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Common stock are pieces (a.k.a. "shares") of a company's equity.
The company wants to issue shares to raise cash.
The stockholders want to purchase shares because of the potential for the company to increase in value over time.
Scenario: You run a lemonade stand, and decide to sell 10 shares of $1 par value common stock at $5 per share.
Cash = 10 shares x $5 per share
Cash = $50
Par value is the legal dollar amount associated with each unit of stock.
Common Stock = 10 shares x $1 par value
Common Stock = $10
The rest of the share price (minus par value) goes into the Additional Paid-In Capital account.
Additional Paid-In Capital = 10 shares x ($5 - $1)
Additional Paid-In Capital = 10 shares x ($4)
Additional Paid-In Capital = $40
Debit to Cash because we are receiving $50 from shareholders for the shares in our company, and assets (Cash) have a normal debit balance.
Credit to Common Stock because we've created $10 worth of par value common stock, and equity accounts (Common Stock) have a normal credit balance.
Credit to Additional Paid-In Capital because we've created $40 worth of extra capital beyond par value, and equity accounts (Additional Paid-In Capital) have a normal credit balance.
