Do You Debit or Credit Common Stock? A Simple Answer

The Accounting Equation and Account Types

Understanding how a company records its financial activities begins with the fundamental accounting equation, which states that Assets equal Liabilities plus Equity. This equation ensures all financial transactions remain in balance within the double-entry accounting system. Assets represent what a company owns, such as cash, equipment, or accounts receivable from customers. Liabilities are what a company owes to external parties, like accounts payable to suppliers or loans from banks. Equity represents the owners’ stake in the company, the residual value after liabilities are subtracted from assets.

Beyond these three core components, accounting categorizes all financial activities into five primary account types. Assets and Liabilities are balance sheet accounts, representing a company’s financial position at a specific point in time. Equity is also a balance sheet account, reflecting the ownership interest.

The remaining two account types, Revenues and Expenses, appear on the income statement and summarize performance over a period. Revenues are the income generated from a company’s operations, such as sales revenue from goods or services. Expenses are the costs incurred to generate those revenues, including items like rent expense or salaries expense. Every financial transaction impacts at least two of these five account types, ensuring the accounting equation always remains in equilibrium.

Understanding Debits and Credits

Recording financial transactions relies on debits and credits, fundamental to the double-entry accounting system. Every account in accounting has two sides: the left side is known as the debit side, and the right side is known as the credit side. These terms do not inherently mean “increase” or “decrease”; rather, their effect depends entirely on the type of account being adjusted.

For accounts that typically hold a debit balance, such as Assets and Expenses, a debit entry will increase their value. Conversely, a credit entry to an Asset or Expense account will decrease its value. This rule establishes how these accounts normally behave when their balances grow.

Conversely, accounts that typically hold a credit balance include Liabilities, Equity, and Revenue. For these accounts, a credit entry will increase their value. Therefore, a debit entry to a Liability, Equity, or Revenue account will decrease its value.

Common Stock as an Equity Account

Common stock is an important part of the Equity section of a company’s balance sheet. It represents the ownership shares that a corporation issues to its investors, giving them a claim on company assets and earnings. When individuals or entities purchase common stock, they become partial owners of the company, and the funds received contribute to the company’s capital.

Because common stock is an equity account, it follows the accounting rules established for all equity accounts. Based on these rules, equity accounts normally carry a credit balance. This means that an increase in the common stock account is recorded with a credit entry.

Conversely, a decrease in the common stock account, although less common for the main common stock ledger itself, would be recorded with a debit. The normal credit balance of common stock reflects its nature as a source of capital provided by the owners, contributing to the overall equity of the business.

Recording Common Stock Transactions

When a company issues common stock to raise capital, the transaction directly impacts the common stock account. As common stock represents an ownership stake and is an equity account, an increase in its value is always recorded with a credit. This aligns with the fundamental accounting principle that increases in equity are recognized on the credit side of the ledger.

For example, if a company issues common stock for cash, the Cash account, which is an asset, will increase. An increase in an asset account is recorded with a debit. Simultaneously, the Common Stock account, an equity account, will also increase, and this increase is recorded with a credit. This dual entry ensures the accounting equation remains balanced, with the debit to Cash equaling the credit to Common Stock.

In situations where common stock is issued at a price above its stated par value, the additional amount received is recorded in a separate equity account called Additional Paid-in Capital (APIC). Both the Common Stock account and the APIC account are credited to reflect the total capital contributed by shareholders.