The difference between par and no par value stock
/What is Par Value?
Par value is the stock price stated in a corporation’s charter. The intent behind the par value concept was that prospective investors could be assured that an issuing company would not issue shares at a price below the par value. By setting the par value at the lowest possible unit of currency, a company avoids any trouble with future stock sales if its shares begin to sell in the penny stock range. Many states consider the par value concept to be outmoded, and so allow shares to be sold with no par value.
What is Par Value Stock?
Par value stock refers to the shares of a company that are issued with a par value associated with them. For example, a corporation might issue stock with a par value of $0.01 per share. This par value amount is recorded in a separate account in the issuer’s general ledger.
What is No Par Value Stock?
No par value stock refers to the shares of a company that are issued with no par value associated with them. This means that par value does not appear anywhere on the issuer’s stock certificates. Also, the full amount received when the issuer sells these shares is recorded in a common stock or preferred stock account, with no reference to par value.
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Comparing Par Value and No Par Value Stock
The decision to issue either par or no par value stock is made by the state government in which a business is incorporated. If the government requires that stock be issued with a par value, then the firm must do so. Typically, the mandated amount of par value is quite small, such as a penny per share, so the difference between the two concepts is essentially immaterial.
A further difference between the par and no par value concepts can be found in the accounting rules, where the par value of issued shares must be recorded in a separate equity account. Any additional amount paid in excess of the par value is recorded in the additional paid-in capital account. When the separate recordation of par value is not required by state law, then the credit is to a single equity account.
Example of Par Value and No Par Value Stock Sales
The Munchable Donut Company issues 1,000 shares of its common stock for $15 per share, with a par value of $0.01 per share. This results in a debit of $15,000 to the cash account, a credit of $10 to the common stock account (to record the par value) and a credit of $14,990 to the additional paid-in capital account to record the residual paid-in amount.
If the company had been incorporated in a different state where there was no requirement relating to par value, then the entry would instead have been a $15,000 debit to the cash account and a $15,000 credit to the common stock account.