Stock subscription accounting
/What is a Stock Subscription?
Stock subscriptions are a mechanism for allowing employees and investors to consistently purchase shares of company stock over a long period of time, usually at a price that does not include a broker commission. These arrangements are relatively uncommon, but have some advantages for both parties, as described next.
Advantages of Stock Subscriptions
There are several advantages associated with stock subscriptions, which are as follows:
Lower cost for buyers. Because there is no commission, the price at which shares are purchased represents a good deal for buyers.
Lower employee turnover. Stock subscriptions can reduce shareholder and employee turnover, since they have an interest in remaining with the company to continue to take advantage of the subscription deal.
Increased funding. The arrangement can trigger a modest increase in the amount of funding available to the company.
How to Account for a Stock Subscription
To account for a stock subscription, create an account receivable for the full amount expected to be paid, with an offsetting credit to a stock subscription account. This receivable account is not part of the Trade Receivables account; instead, it is designated as Stock Subscriptions Receivable. When the company later receives cash from the subscribing parties and issues stock to them, the receivable is eliminated. At this point, the stock issuance is recorded in the normal manner.
Related AccountingTools Courses
Example of Stock Subscription Accounting
The Close Call Company offers stock subscriptions to its employees, who elect to purchase 20,000 shares of common stock with no par value, for a total of $60,000. The entry is:
| Debit | Credit | |
| Stock subscriptions receivable | 60,000 | |
| Common stock subscribed | 60,000 |
When Close Call receives the various payments totaling $60,000, it credits the stock subscriptions receivable account and moves the amount recorded in the common stock subscribed account to the common stock account, as detailed in the following entry:
| Debit | Credit | |
| Cash | 60,000 | |
| Stock subscriptions receivable | 60,000 | |
| Common stock subscribed | 60,000 | |
| Common stock | 60,000 |