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Which of the following accounts normally has a credit balance under the debit-credit rules of financial accounting?
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2. Transaction Analysis
Journal Entries: Debits and Credits
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In a journal entry, when a corporation issues common stock for cash, how is the Common Stock account normally recorded?
A
Debited, because Common Stock is an asset account that increases with debits.
B
Debited, because Common Stock is an equity account that increases with debits.
C
Neither debited nor credited; it is only disclosed in the notes.
D
Credited, because Common Stock is an equity account that increases with credits.
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Understand the nature of the Common Stock account: it is an equity account representing ownership in the corporation.
Recall the accounting rule that equity accounts increase with credits and decrease with debits.
When a corporation issues common stock for cash, the company receives cash (an asset), which increases and is therefore debited.
Simultaneously, the Common Stock account increases to reflect the issuance of shares, so it is credited.
Therefore, in the journal entry, Common Stock is credited because it is an equity account that increases with credits.
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