Final answer:
Cash invested by shareholders for shares is recorded by debiting the cash account and crediting the contributed capital or common stock account. This transaction increases the firm's assets and equity. Investors can earn returns through dividends or capital gains.
Step-by-step explanation:
When cash is invested by shareholders in exchange for shares, it is initially recorded in the accounting records with two entries. Firstly, the cash account is debited with the amount of the investment, indicating an increase to the company's assets. Secondly, the contributed capital or common stock account is credited with the same amount, reflecting an increase in the company's equity. This represents the initial public offering (IPO) where a firm receives financial capital from the public in exchange for shares of ownership.
Investors then have the potential to earn a rate of return, which can come in the form of dividends, where the company makes direct payments to shareholders, or through capital gains, which occur when the sold shares increase in value from the time they were bought.