Final answer:
In capital stock subscription, payments from investors are recorded by accountants as debits to the Cash account. These transactions increase the company's assets as they receive money. Capital stock subscriptions are credited as Subscriptions Receivable or Capital Stock Subscribed, not as Common Stock or Retained Earnings until the shares are issued.
Step-by-step explanation:
In capital stock subscription, as the investor sends in payments, the accountants record them as debits to: Cash. When a payment is made towards the purchase of capital stock, the cash account of the company increases because it is receiving money. Therefore, the cash account is debited in accounting terms, reflecting an increase in the company's assets. Meanwhile, the subscriptions to capital stock are recorded as credits to an account such as Subscriptions Receivable or Capital Stock Subscribed, but not in accounts like Retained Earnings or Common Stock until the full payment is received and shares are actually issued.
When firms issue stocks as part of their capital structure, they enable investors to receive a rate of return through two main avenues: dividends and capital gains. Dividends represent a direct payment from the firm to the shareholders, and capital gains are realized when an investor sells their share for a higher price than what they paid initially. For example, buying a share of stock at $45 and selling it later for $60 results in a $15 capital gain.
Stock represents ownership in a firm and is divided into shares. When stock is sold to the public, possibly through an Initial Public Offering (IPO), the firm receives financial capital. However, subsequent trades of the stock between investors do not funnel capital into the company.