Wize University Introduction to Financial Accounting Textbook > Transaction Analysis
Journalizing Equity Related Transactions
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Journalizing the Issuance of Shares
Shares represent small pieces of ownership of the business and companies issue shares to raise money from investors. This money is then used by companies for the development and growth of their businesses.
Issuing Shares for Cash
- Most common transaction involving the issuance of shares
- Increases cash (assets) and common shares (equity)
- You can also credit the Contributed capital account
Issuing Shares to buy Assets
- Companies do this to conserve cash
- Increases asset category and contributed capital by the value of the asset.
Issuing Shares to pay off Debt
- Companies do this to conserve cash.
- Some creditors have the option to convert debt to equity.
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Declaring and Paying Dividends
Each year, a business must decide how much of its profits should be reinvested in the company (retained earnings) and how much should be distributed to its owners (dividends).
Declaring a Dividend
- Companies generally have no legal obligation to pay dividends
- When a dividend is declared, the company is liable to pay it
- Dividends decrease Retained earnings
- Liability created is called Dividends payable
Exam Tip
You can also debit Retained Earnings instead of Dividends Declared
Paying a Dividend
When dividends are paid, liability is decreased and cash is decreased.
Declaring and Paying a Dividend at the same time
Decreases Retained earnings and Cash
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Example: Issuing Shares
Prepare the journal entries to record the following transactions.
- Sold 50,000 new common shares to investors for $20 per share.
- Purchased a new building, the cost of the building is $600,000. Half is paid in cash and the rest is paid for by issuing shares.
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Example: Declaring and Paying Dividends
Prepare the journal entries to record the following transactions.
- On January 17th, 2020, declared a $2 per share cash dividend to the 60,000 outstanding common shares.
- On February 14th, 2020 paid the dividend that was declared on January 17th.
- On March 8th, 2020 declared and paid a cash dividend totalling $50,000
Practice: Issuing Shares
Prepare the journal entries to record the following transactions.
Repaid a $100,000 note to a creditor by issuing common shares.
Transactions:
| Account | Debit | Credit |
|---|---|---|
Practice: Declaring and Paying Dividends
Prepare the journal entries to record the following transactions.
Declared and paid a $90,000 cash dividend.
Transactions:
| Account | Debit | Credit |
|---|---|---|