Definition of Par Value Stock
Some states' laws require or may have required common stock issued by corporations residing in their states to have a par value. If a par value is required, the corporation will likely assign a very small amount per share of common stock. The par value is also referred to as the corporation's legal capital.
On the other hand, if a corporation issues preferred stock , this stock's par value is meaningful since its dividends are expressed as a percentage of the preferred stock's par value.
Examples of Stock with Par Values
If a corporation's common stock has a par value, the par value of an issued share of common stock must be recorded in an account separate from the amount received over and above the amount of par value. For example, if a corporation issues 100 new shares of its common stock for a total of $2,000 and the stock's par value is $1 per share, the accounting entry is a debit to Cash for $2,000 and a credit to Common Stock—Par $100, and a credit to Paid-in Capital in Excess of Par for $1,900. In total the Cash account increased by $2,000 and the paid-in capital reported under stockholders' equity increased by a total of $2,000 ($100 + $1,900).
If a corporation issues 500 shares of 5% preferred stock with a par value of $100 per share and receives $50,000, the entry will debit Cash for $50,000 and will credit 5% Preferred Stock for $50,000. The corporation agrees to pay the preferred stockholders dividends of $2,500 (par value of $50,000 X 5%) each year.
Example of Stock with No Par Value
If a corporation is not required to have a par value (or a stated value) for its common stock and the corporation issues 100 shares for $2,000, the accounting entry will debit Cash for $2,000 and will credit Common Stock for $2,000.