When Is Common Stock Considered an Asset?

The classification of common stock as an asset depends entirely on the perspective of who holds it. For an individual or institution that buys stock, it functions very differently than for the company that issues it. Common stock represents a share of ownership in a publicly-traded corporation, granting the holder a claim on the company’s assets and earnings. Understanding its role requires looking at it from two distinct viewpoints: that of the investor and that of the issuing corporation.

Common Stock as an Investment Asset

From an investor’s perspective, common stock is an asset. An asset is a resource with economic value that an individual owns with the expectation that it will provide a future benefit. Common stock fits this description as it is purchased with the anticipation of financial gain, which can be realized in two primary ways: capital appreciation and dividends. The potential for the stock’s market price to increase over time is a primary driver for investors.

When an individual purchases shares, they are buying a small piece of that company. This ownership stake is a financial asset because it is a contractual claim that can be converted into cash. On a personal financial statement, these shares are listed under investments, a category of assets. The value of this asset can fluctuate based on the company’s performance, market sentiment, and economic conditions.

Common stock can also generate income through dividends. While not guaranteed, companies may distribute a portion of their profits to shareholders, providing a return on the investment. This income stream solidifies the stock’s classification as a productive asset for the shareholder.

The Role of Common Stock on a Company’s Balance Sheet

For the company that issues stock, the classification is different; its own common stock is not an asset. Instead, it is a component of stockholders’ equity, which is understood through the basic accounting equation: Assets = Liabilities + Stockholders’ Equity. This formula dictates that a company’s assets are funded by either debt (liabilities) or owner contributions (equity).

When a corporation sells shares of its common stock, it receives cash from investors. This cash is recorded on the balance sheet as an asset that the company can use to fund operations, expand, or pay down debt. In exchange for this cash, the company gives the investor an ownership interest. This transaction increases the company’s assets and its stockholders’ equity.

The common stock listed in the equity section represents a claim on the company’s assets by its owners, not a resource the company owns. It signifies a source of capital raised from owners, different from an asset like machinery or inventory that is used to generate revenue. From the corporation’s standpoint, issuing stock is a financing activity, not the acquisition of an asset.

Recording and Valuing Common Stock

The accounting for common stock differs for the investor and the issuing company. An investor initially records the purchase of common stock at its cost, which is the price paid plus any transaction fees. On a personal statement of financial condition, this investment is later reported at its current fair market value, meaning the value is updated to reflect its quoted market price.

The issuing company records the transaction in its stockholders’ equity section. The amount is split between two accounts: “Common Stock” and “Additional Paid-in Capital.” The common stock account is credited for the par value of the shares, a nominal value assigned in the corporate charter. Any proceeds received above the par value are recorded in the “Additional Paid-in Capital” account.

For example, if a company issues 1,000 shares with a $1 par value for $50 per share, it receives $50,000 in cash. On the equity side, the “Common Stock” account increases by $1,000, and the “Additional Paid-in Capital” account increases by the remaining $49,000.