Question

When stock is issued, there is a separate ledger account for each class of stock. The accountant records investments of cash as:

a) Debits to the Common Stock
b) Debits to the Preferred Stock
c) Debits to the Retained Earnings
d) Debits to the Treasury Stock

Answer 1

The correct recording of cash investments when stock is issued is a debit to the Cash account and a credit to the Common Stock or Preferred Stock account, depending on the class of stock issued.

Step-by-step explanation:

When issuing stock, accountants record the receipt of cash by debiting the cash account. This cash investment typically increases the company's assets. Correspondingly, the accountant credits the specific equity account related to the class of stock issued - either Common Stock or Preferred Stock - which represents the shareholders' equity, not an expense. Retained Earnings and Treasury Stock are not recorded at this initial point of stock issuance. Retained Earnings reflect the accumulated net income that has been retained within the company rather than distributed as dividends, while Treasury Stock represents the company's own shares that have been reacquired. Therefore, when investments of cash are made through the purchase of a firm's stock, the proper accounting entry is a debit to the Cash account and a credit to either the Common Stock or Preferred Stock account.