Preferred Shares

Preferred stock is just like common stock with a few added benefits for improved security of investment.

First, preferred stock owners get first dibs on dividends...

Scenario: After issuing your first round of common stock, more investors have been wanting to purchase shares. However, they want first dibs on dividends, as well as priority in repayment in case the company goes under. You decide to sell 20 shares of $10 par preferred stock at $15 per share.

...and second, they get priority in asset distribution in case the company becomes dismantled.

Scenario: After issuing your first round of common stock, more investors have been wanting to purchase shares. However, they want first dibs on dividends, as well as priority in repayment in case the company goes under. You decide to sell 20 shares of $10 par preferred stock at $15 per share.

Outside of these difference... preferred stock works very similar to common stock!

Remember: the par value is the legally dollar amount associated to each share of preferred stock. In our situation, each preferred stock share has a par value of $10...

Scenario: After issuing your first round of common stock, more investors have been wanting to purchase shares. However, they want first dibs on dividends, as well as priority in repayment in case the company goes under. You decide to sell 20 shares of $10 par preferred stock at $15 per share.

...and we're selling 20 total shares.

Scenario: After issuing your first round of common stock, more investors have been wanting to purchase shares. However, they want first dibs on dividends, as well as priority in repayment in case the company goes under. You decide to sell 20 shares of $10 par preferred stock at $15 per share.

Therefore, we're dealing with $10 x 20 shares = $200 in Preferred Stock with this issuance of preferred shares!

We can record this with a credit to the Preferred Stock account (which is an equity accounting having a normal credit balance), since we're increasing our total preferred stock!

TransactionDebitCredit
??????
     Preferred Stock$200
     ??????

While the par value of these preferred shares is $10, we're selling them for $15...

Scenario: After issuing your first round of common stock, more investors have been wanting to purchase shares. However, they want first dibs on dividends, as well as priority in repayment in case the company goes under. You decide to sell 20 shares of $10 par preferred stock at $15 per share.

...therefore, we are taking on ($15 - $10) x 20 shares = $100 in Additional Paid-In Capital!

Additional Paid-In Capital is an equity account (having a normal credit balance), therefore to increase it we must credit it by $100!

TransactionDebitCredit
??????
     Preferred Stock$200
     Additional Paid-In Capital$100

When a company issues preferred stock shares, they're essentially selling off equity in their company. And... they get paid in cash for that sale!

How much cash will we be collecting in this situation?

Well, there's 20 shares, and each are sold at $15...

Scenario: After issuing your first round of common stock, more investors have been wanting to purchase shares. However, they want first dibs on dividends, as well as priority in repayment in case the company goes under. You decide to sell 20 shares of $10 par preferred stock at $15 per share.

...therefore, in total, we're collecting 20 shares x $15 = $300 in cash!

To record this increase in Cash, we're going to debit the account (since assets have a normal debit balance)!

TransactionDebitCredit
Cash$300
     Preferred Stock$200
     Additional Paid-In Capital$100
TransactionDebitCredit
Cash$300
     Preferred Stock$200
     Additional Paid-In Capital$100
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