Bed Linens Business – Accounting Treatment For Capital Stock Ownership

 Bed Linens Business – Accounting Treatment For Capital Stock Ownership

A person acquires ownership in a corporation by purchasing some of its stock certificates. For example, if Unique Beach Towel Corporation has sold 100 shares of stock to various persons and if Bed Linens Company has acquired 40 of these shares, Bed Linens Company has 40% ownership of Unique Beach Towel Corporation.

When a corporation has  bed linens online accumulated a certain amount of profits, its directors may choose to take some of the funds generated by the profits and to divide them up proportionately among the stockholders. The amount so divided is called dividend.

There is no obligation for the directors to pay a dividend to the common stockholders each year. Also, when dividends are declared, there is no requirement that the amount of dividends be related to the amount of net income in the current year; that is, the declaration of dividends is optional.

A share of stock entitles the holder to:

(1) A share of ownership,

(2) Dividends, if and when declared, and

(3) A vote on certain matters.

Sometimes a corporation may issue two or more classes of stock. For example, sometimes there may be one class entitled only to the privileges mentioned above, and a second class entitled to preferential treatment with regard to dividends or with regard to the distribution of assets in the event of liquidation. The former is called common stock; the latter is called preferred stock.

Preferred stockholders usually have preference to a stated amount of annual dividends. For example, if Unique Beach Towel Corporation has issued $100,000 of 6% preferred stock, the common stockholders usually do not receive dividends until the preferred stockholders have received their full dividend, amounting to 6% of their investment.

Because the common stockholders’ participation in dividends and in claims against assets in the event of liquidation is always penultimate to other classes of stockholders, they are called the residual owners.

Sometimes stock is issued with a specific amount printed on the face of each certificate. This amount is called the par value. Stock that has a par value printed on its face is not necessarily purchased at that amount (at par). Instead, it is often purchased at a premium (for an amount more than par).

Par value stock could theoretically be sold by the corporation to an investor at a discount (that is, at less than par). However, since the individual stockholders may be required to contribute the amount of the discount in cash if the company later goes bankrupt, stock that is sold at a discount from par value is unpopular with investors and is therefore rare.

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