Final answer:
Preferred stock is a type of equity security with priority over common stock in dividend distribution and asset claims. It is recorded on a company’s balance sheet under shareholders’ equity, differentiated from common stock and potentially including additional paid-in capital if issued above par value.
Step-by-step explanation:
Preferred stock is a class of ownership in a corporation that has a higher claim on the assets and earnings than common stock. Preferred shares generally have a dividend that must be paid out before dividends to common shareholders and the shares usually do not have voting rights. The financial entry for issuing preferred stock includes debiting cash and crediting the preferred stock account at the par value of the shares issued. If preferred stock is issued at a price higher than par value, the excess is credited to an additional paid-in capital account.
On the balance sheet (BS), preferred stock is presented under the shareholders’ equity section. It is separated from common stock to distinguish the different rights and characteristics of each class of stock. The par value of the preferred stock is listed along with any additional paid-in capital that may have arisen from issuing the preferred stock at a price above its par value.