No Par Stock Journal Entry in Accounting

A par value is a nominal or face value given to a share in the stock of a company authorized by its charter. No par stock is stock issued without a par value.

In the past companies issued shares with significant par values such as 10.00 per share leading to confusion between this arbitrarily assigned amount and the actual market value of the shares with which it has no link. To avoid this confusion shares are now issued with minimal par values such as 0.0001 per share or as no par shares.

It should be noted that not all jurisdictions (including the UK) permit the issue of no par stock.

No Par Common Stock Journal Entry

When no par stock is issued the entire proceeds received from investors is credited to the capital account. The amount credited is based on the number of shares issued and the issue price per share.

Suppose for example a business issues 1,000 shares of no par common stock at a price of 2.00. The amount credited to the common stock account is calculated as follows.

Common stock account = Number of shares x Price per share
Common stock account = 1,000 x 2.00 = 2,000

Since the shares are no par stock the entire proceeds is credited to the common stock account and the following no par common stock journal entry is made in the accounting records.

Issue of no par stock
Account Debit Credit
Cash 2,000
Common stock 2,000
Total 2,000 2,000

No Par Stated Value Stock

Sometimes a no par stock is given a stated value by the board of directors of the business. The effect of the stated value is that the share operates as though it had a par value.

Suppose in the above example the business had issued no par stock but the board of directors had given the shares a stated value of 0.50. The amount shown on the common stock account in this instance would be calculated as follows.

Common stock account = Number of shares x Stated value per share
Common stock account = 1,000 x 0.50 = 500

The proceeds in excess of the stated value are recorded as additional paid in capital (APIC) and calculated as follows.

APIC = Number of shares x Amount in excess of stated value
APIC = 1,000 x (2.00 - 0.50) = 1,500

The journal entry to record this no par stock issue is as follows.

Issue of no par stock with stated value
Account Debit Credit
Cash 2,000
Common stock 500
APIC 1,500
Total 2,000 2,000

In this instance the common stock account is credited with the stated value (500) and the amount in excess of stated value (1,500) is recorded as additional paid in capital (APIC). It can be seen that the bookkeeping journal entries for no par stock issued with a stated value are the same as those for stock issued with a par value as demonstrated below.

Suppose in the above example the business had issued stock with a par value of 0.50. The amount shown on the common stock account in this instance would be calculated as follows.

Common stock account = Number of shares x Par value per share
Common stock account = 1,000 x 0.50 = 500

The proceeds in excess of the par value are recorded as additional paid in capital (APIC) and calculated as follows.

APIC = Number of shares x Amount in excess of par value
APIC = 1,000 x (2.00 - 0.50) = 1,500

The journal entry to record this stock issue at a par value of 0.50 is as follows.

Issue of stock with par value
Account Debit Credit
Cash 2,000
Common stock 500
APIC 1,500
Total 2,000 2,000

Difference Between Par Value and No Par Value Shares

There are various disadvantages and advantages of no par value shares including the following.

  1. The par value determines the minimum price at which the business can issue its shares. This can be important for a start-up business as it sets the minimum amount the founders need to pay to purchase their initial shares.
  2. The business has to maintain on its capital account the issued par value of the stock and cannot pay dividends or buy back its own stock if the amount of capital left is reduced below the par value.
  3. If a shareholder has only partially paid for their shares, in the event of the business being in financial difficulty, they are liable to contribute the difference between the par value and the amount already paid. A low par value or no par stock substantially eliminates this liability.
  4. Fees and taxes are often based on the par value of the stock. However, to avoid zero fees and taxes a notional value is often set for stock issued with a no par value.
  5. Theoretically if the value of the stock is less than the par value the business has a liability to pay the shareholders the difference between the two. Again, a low par value or no par stock substantially eliminates this liability.
  6. The use of a par value sets a minimum price for the stock. The price of a no par stock is determined only by supply and demand.

Disclosure of No Par Stock in the Financial Statements

When common stock no par value is issued the amount invested by the shareholders is credited to the common stock account and included on the balance sheet as part of the shareholders equity.

The following shows an example of no par value stock disclosure in the 2017 financial statements of Nordstrom, Inc.

no par stock
Balance sheet extract showing no par value stock
No Par Stock Journal Entry in Accounting June 7th, 2018Team

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