Journal Entry to Issue Preference Shares
Preferred share is a type of share that company issue to the investors to raise capital. The company will provide fixed dividend to the shareholders.
A company’s share capital refers to the money that has been invested in the company by its shareholders. This money is used to finance the company’s business activity and growth operation. The share capital can be divided into two categories: equity and debt. Equity is funding that comes from shareholders, while debt is funding that is borrowed from lenders. Both types of financing have their own advantages and disadvantages.
For example, equity is a more stable source of funding, but it can be expensive to raise. Debt, on the other hand, is typically less expensive, but it can put the company at risk if the loans are not repaid. As a result, it is important for companies to carefully consider their options when it comes to raising capital.
There are two primary types of shares: common shares and preferred shares. Common shares represent ownership in a company and entitle the shareholder to vote on corporate matters, receive dividends, and share in the company’s assets in the event of liquidation. Preferred shares often do not carry voting rights, but they have a higher claim on assets and dividends than common shares.
Preferred shareholders may also be entitled to a fixed dividend, which is paid before any dividends are paid to common shareholders. While common shares may offer more upside potential, preferred shares offer greater downside protection. As such, each type of share has its own distinct advantages and disadvantages.
The issuing of the preferred shares will allow the company to raise more cash to support the operation. At the same time, it will increase the equity as well.
Journal Entry for Issue of Preferred Share
The company has issued preference shares to raise the capital to support the business operation. Preference shares are a type of equity instrument that gives the holder certain rights and privileges.
Similar to common stock, the preferred stock has the par value which is the value that mentions on the certificate. The company may be able to issue the preference share over the par value.
When issuing the preference shares, the company will be able to raise the cash on the balance sheet. It will increase the equity section of the company.
The journal entry is debiting cash and credit preferred share, paid-in-capital.
| Account | Debit | Credit |
|---|---|---|
| Cash | 000 | |
| Preferred Share | 000 | |
| Paid-in-Capital | 000 |
Example
Company ABC issues the preferred share to the market with a par value of $ 1 per share. The company is able to issue the preferred share for $ 100 per share. The total number of preferred shares is 1,000 shares. Please prepare the journal entry for issuing of preferred share.
The company issued preferred shares to raise the capital to expand the operation. The preferred share issued more than the par value. It will generate the paid-in-capital in the Equity section.
The paid-in-capital is $ 99 per share ($ 100 – $1).
The journal entry is debiting cash $ 100,000 and credit preferred share $ 1,000, paid-in-capital $ 99,000.
| Account | Debit | Credit |
|---|---|---|
| Cash | 100,000 | |
| Preferred Share | 1,000 | |
| Paid-in-Capital | 99,000 |
The entry will increase cash $ 100,000 on the balance sheet. It also increases the equity section which consists of both preferred share $ 1,000 and paid-in-capital $ 99,000.
