a company can raise funds in the open market by um by issuing stock and investors can invest and become stockholders in the company's um um in in the company by subscribing to the stocks um when these stocks are issued when a company issues common stock the journal entry to record the cash that comes into the company from the stockholders is cash debit common stock credit for example 30,000 and 30,000 sometimes the company can have a par value for the common stock which is also known as the legal capital and um if the par value of let us say 1,000 shares is 1 cent per share and the company issues the common stock for $30 per share then the company receives on,000 shares at $30 each they receive $30,000 now this $30,000 is the cash received however the common stock has to be credited only for 1 cent per share which is $10 and the extra money goes into additional paid in capital PIC for paid in capital and this is the difference between the total cash received minus the par value of the common stock and in this case this is 2990 Now let us look at preferred stock preferred stocks are issued by some corporations in addition to common stock now the term preferred means that these stockholders usually have the first right to a specified amount of de dividends known as preferred dividends and also if the company dissolves then the preferred stockholders receive preference um in um receiving the um the distribution of assets over common stockholders um the preferred stockholders usually do not have voting rights um but apart from that the journal entries work in a similar way as the common stock so for example for preferred stock you would just have cash 30,000 preferred stock 30,000 if the amounts were the same and the equivalent journal entry for this would be cash 30,000 preferred stock $10 and additional paid in capital for preferred stock $29,990 that is if,000 shares of preferred stock were issued sometimes companies buy back their own stock uh for several reasons they might do so to um uh increase the price of their underpriced stock in the open market or they might want to boost their earnings per share um because the number of shares outstanding would um go down if the treasury stock um is purchased and I will show that through the formula right now and also uh they could buy back their treasury stock um if they need some um uh some stock to um u give as employee stock options to key stockholders now the shares outstanding of a company equals shares issued minus treasury stock and as we know the shares outstanding the number of shares outstanding is the denominator while calculating earnings per share so the higher the treasury stock all else equal the shares outstanding would go down now let us look at the journal entries when the company buys back its own treasury stock first of all this is a contra to the stockholders equity account the treasury stock reduces the stockholders equity and it has a normal debit balance because the stockholders equity has a normal credit balance when a company buys back its own stock you debit treasury stock normal debit balance and credit cash because the company uses cash to purchase its treasury stock and then later the company might decide to sell some of its existing treasury stock because it no longer needs it and it may receive some cash for example it may sell 100 at $35 but it was these 100 shares were purchased at $30 so the difference goes into additional paid in capital this is not a gain on in the P&L account it's very important to understand that um treasury stock cannot be purchased and sold to make gains on the P&L account it can only be used uh for some strategic transactions with prior approval and now here uh when we debit cash and we credit treasury stock we also credit additional paid in capital because we are looking at the cost price of treasury stock and we're getting something more than the cost price and the difference goes to additional paid in capital let's now look at dividends when a company declares dividends on the declaration date the journal entry will be dividends debit for example 500 and dividends payable credit 500 100 and then uh let's say this is March 15th after that the date of record is the point where there is no journal entry but the um investor relations department of the company um looks at the records and make sure they have the updated information on the stockholders um whoever they have on the date of record as the investors who own the stock those are the ones who will actually receive the dividend so on the date of record no journal entry and then if the date of payment is April 15th then we do dividends payable debit and cash credit so at this point the liability that we set up on the date of declaration is reversed by paying out actual cash to the stockholders at the end of the year this dividends account which is a temporary account is closed into retained earnings let us now look at stock dividends sometimes companies will not give dividends in the form of cash but they will give it in the form of stock stock dividends can be large or they can be small large stock dividends are worth 25% or more um so for example if a stockholder holds 100 shares and the company declares a 30% stock dividend this is a large stock dividend this will be a large stock dividend now if the company declares something lower than 25% like a 10% um uh that would be for for example a small stock dividend so this is large here this is small here so here let us see what the journal entries for a small stock dividend is let us say um stockholder owns,000 shares and the company declares a 10% stock dividend now this 10% we know is a small stock dividend and therefore it has to be valued at market value that's the key thing about small stock dividend so we debit stock dividends we credit common stock and we credit additional paid in capital and so the stock dividend is debited for $3,000 in this case 1,000 * 10% * 30 the common stock is credited for $1 because the information in the question is 1,000 shares have a par value of 0.01 so I realize I've not given you the question fully but you have to take the par value and credit common stock for that par value here so 1,000 shares times.1 1 cent per share so that's $1 per value and the remaining goes into additional paid in capital this is for the small stock dividend so small stock dividend now for the large stock dividend we do not value it at market value so let us say the large stock dividend was declared and the loss stock dividend is for um let's say 50% and the par value is 1 cent so for every,000 shares we are going to get 500 shares and then 1 cent will be $5 so the journal entry to record that stock dividend will be because it's a large stock dividend will be stock dividend debit and common stock credit only for the par value there is no question of bringing the market value into it this is the par value finally let's look at stock splits stock splits means a company's original stock is split it could be a 2 is to 1 split or it could be a 3 is to 1 or a 3 is to2 whatever ratio um could um there could be a predeclared stock split and in this stock split these are examples what happens is an existing share um splits into for example In a 2 is to1 stock split an existing one share splits into two shares and there is no journal entry to record a stock split but the par value of the share will reduce for example in a 2 is to1 stock split if the par value is $1 per share before the stock split after the stock split it will become 50 cents per share in a 2 is to1 stock split so to sum up stock dividends and stock splits in a stock split the total stockholders equity has no change the number of shares go up but the par value reduces and then in a stock dividend also the total shares there is no change total shareholders equity or stockholders equity there is no change for the common stock for the stock split there is no change however there is an increase in common stock in a stock dividend because we have given out um more stocks uh in the form of a stock dividend the retained earnings in a stock split has no change but in a stock dividend the retained earnings decreases this is important the retained earnings decreases because ultimately the stock dividend debit that we did in the previous um slide journal entry that goes and reduces the retained earnings this is important to note however in a stock split since there is no journal entry it does not impact the retained earnings now the par value per share decreases for sure in a stock split because we're taking one share and splitting it in this case 2 is to 1 and then in a stock dividend we are having no change to the par value per unit