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Equity
ASC 505: Equity
📖 Overview
This standard prescribes accounting treatment for equity, including share issuance, treasury stock, and dividends. GAAP widely uses the par value system.
🎯 Scope
This standard applies to the accounting treatment for equity, including:
- Share issuance.
- Treasury stock.
- Dividends.
- Additional Paid-In Capital (APIC).
⚙️ Key Principles
1. **Common Stock**:
- Recorded at Par Value.
- The difference between issue price and par value is recorded as Additional Paid-In Capital (APIC).
2. **Preferred Stock**:
- May be redeemable or non-redeemable.
- Redeemable preferred stock may be classified as debt in some cases (ASC 480).
3. **Treasury Stock**:
- Shares repurchased by the company.
- Deducted from equity (appears as a negative or debit balance).
- Two methods for recording:
- **Cost Method**: Most common.
- **Par Value Method**: Less common.
4. **Dividends**:
- Recorded when declared by the board of directors.
- Deducted from Retained Earnings.
✅ Recognition
Shares are recognized when issued.
Treasury stock is recognized when repurchased (appears as a deduction from equity).
Dividends are recognized when declared by the board of directors (appears as a deduction from retained earnings).
No gains or losses from treasury stock sales are recognized in the income statement (appear only in equity).
📏 Measurement
**Share Issuance:**
- **At Par**:
- Dr. Cash (at issue price).
- Cr. Common Stock (at par value).
- **At Premium**:
- Dr. Cash (at issue price).
- Cr. Common Stock (at par value).
- Cr. APIC (for the difference).
**Treasury Stock - Cost Method:**
- Dr. Treasury Stock (at purchase price).
- Cr. Cash.
**Treasury Stock Reissuance - Cost Method:**
- Dr. Cash (at sale price).
- Cr. Treasury Stock (at purchase cost).
- Cr. APIC (if sale price > cost).
- Dr. APIC (if sale price < cost).
**Dividends:**
- When declared: Dr. Retained Earnings, Cr. Dividends Payable.
- When paid: Dr. Dividends Payable, Cr. Cash.
📊 Presentation
**On the Balance Sheet:**
- Common and preferred stock appear in the equity section.
- Additional Paid-In Capital (APIC) appears as a separate line item.
- Treasury stock appears as a deduction (debit balance) from total equity.
- Retained earnings appear as a separate line item.
**On the Statement of Changes in Equity:**
- Changes in each equity component.
- Net profit or loss.
- Dividends.
- Share issuance or repurchase.
**Note Disclosures:**
- Number of shares authorized, issued, and outstanding.
- Par value per share.
- Rights and obligations of each share class.
📝 Disclosure Requirements
Disclosures required:
- Number of shares authorized, issued, and outstanding.
- Par value per share.
- Rights and obligations of each share class (voting rights, dividend preferences, liquidation preferences).
- Treasury stock movement.
- Dividends declared during the period.
- Any legal or contractual restrictions on dividend distributions.
- For redeemable preferred stock: Redemption terms and classification (liability or equity).
🔗 Related Standards
ASC 480 (Distinguishing Liabilities from Equity), ASC 260 (Earnings Per Share), ASC 718 (Stock-Based Compensation)
📁 Related Accounts in the Chart of Accounts
Explore accounts commonly associated with this accounting standard.