Common Stock Asset or Liability: Everything You Need to Know
One difference between common stock asset or liability is that common stock is not an asset nor a liability.3 min read
One difference between common stock asset or liability is that common stock is not an asset nor a liability. Instead, it represents equity, which establishes an individual's ownership in a company. A liability is an obligation consisting of an amount owed to another individual. A liability can also be money received in advance prior to its being earned.
Overview of Stock Classifications
- Stocks are divided into different categories that include common stock, preferred stock, and hybrid stock.
- Keep in mind a stock equals equity.
- Assets are linked to economic resources. These resources are expected to produce and provide economic benefits to the owner.
- When dealing with the debt portion of equity, this means both the equity and the debt are sources of funding.
- For the profit portion that a business earns, the funds are added to the surplus and reserves of a shareholders' equity.
About Common Stock
As an Asset
Common stock held as an investment by an individual or small business is considered an asset. It is classified this way due to the fact future benefits in the form of cash flow are expected by holding the stock.
Whether the classification of common stock is considered current or long-term depends on the company's intent and ability. If the company is solvent and able to hold the common stock for more than a year, the investment is then classified as being long-term. If these conditions are not the case, then it is a current investment.
For shareholders who are holding common stock, there are instances when dividends are paid to the stockholder. Dividends are a distribution of the assets and usually paid in cash. They are paid quarterly or yearly by some companies while other companies do not pay dividends at any time.
When dividends are declared, it is recorded as a debit to the dividends receivable account, which is an asset account. When the dividend is received, an adjustment is made denoting the removal of the receivable. The acknowledgment of the asset (cash or another asset) is then recognized.
Stock issued by a company is considered to be equity of the issuer. For example, a small business owner setting up a business as a corporation opts to issue stock to themselves or to other partners in the business in exchange for resources for the business.
Whether it's a single owner or multi-partnership, whatever money is contributed to starting the new business would be recorded on the accounting balance sheet as cash (asset). The other side of the balance sheet would show an offsetting journal entry for the common stock and listed as equity.
There are certain situations where common stock considered as equity will be classified as debt. When this occurs, the classification of the stock will be moved from equity to liabilities on the balance sheet. Making the determination between debt and equity is complicated and may result in affecting the company's financial statement.
A current liability must be paid either within one year or within the business's operating cycle. It depends on which option is the longest.
This is a short-term liability usually from funding by a bank for a line of credit, for example.
Accounts payable are for the services and products from suppliers that have been delivered but have yet to be paid for.
Wages, Rent, Taxes, and Utilities
These are payables due to employees, a landlord or rental company, the government, and local electric, water, phone, and internet providers.
Accrued Liabilities (Accrued Expenses)
These are expenses that occur prior to receiving a cash payment, such as customer prepayments or dividends.
These are short-term loans, usually with interest, owed to a creditor.
Overview of Long-Term Liabilities
Like assets, liabilities can be classified as either current or long-term. These are obligations that are anticipated to be paid at some point beyond one year or one operating cycle. There are several areas considered to be liabilities.
Long-Term Capital Lease Obligation
This liability involves a written agreement whereby a property owner allows a tenant to rent for a specified period.
Pension Fund Liability
This liability represents the contribution amount the company will supply to the pension fund to ensure future obligations.
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