When a company issues common stock for cash, which of the following statements is true about the accounts affected and the effect on assets and equity?

When a company issues common stock for cash, which of the following statements is true about the accounts affected and the effect on assets and equity?

• A. Debit Revenue; Credit Cash; Assets unchanged; Equity increases.
• B. Debit Cash; Credit Retained Earnings; Assets increase; Equity increases.
• C. Debit Cash; Credit Common Stock; Assets increase; Equity increases.
• D. Debit Cash; Credit Dividends; Assets increase; Equity decreases.

Answer: (C)

When common stock is issued for cash, a company increases both assets (cash) and equity (through common stock). The correct entry is to debit Cash (increase the asset) and credit Common Stock (increase shareholders’ equity). If the cash received exceeds the par value, you would also credit Additional Paid-In Capital for the excess, but the essential effect is asset increase and equity increase. The other statements mix in accounts that aren’t affected by issuing stock. Revenue isn’t involved in a stock issuance, so debiting revenue is incorrect. Retained Earnings reflects earnings or distributions, not new stock issues. Dividends reduce equity, not increase it, and wouldn’t be credited in this transaction.

When common stock is issued for cash, a company increases both assets (cash) and equity (through common stock). The correct entry is to debit Cash (increase the asset) and credit Common Stock (increase shareholders’ equity). If the cash received exceeds the par value, you would also credit Additional Paid-In Capital for the excess, but the essential effect is asset increase and equity increase.

The other statements mix in accounts that aren’t affected by issuing stock. Revenue isn’t involved in a stock issuance, so debiting revenue is incorrect. Retained Earnings reflects earnings or distributions, not new stock issues. Dividends reduce equity, not increase it, and wouldn’t be credited in this transaction.