Preferred Stock

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

• First dibs on dividends
• Priority repayment if company goes under

Scenario: You run a lemonade stand, and decide to sell 10 shares of $3 par preferred stock at $5 per share.

Cash = 10 shares x $5 per share
Cash = $50

Par preferred is the legal dollar amount associated with each unit of preferred stock.

Preferred Stock = 10 shares x $3 par preferred
Preferred Stock = $30

The rest of the share price (minus par preferred) goes into the Additional Paid-In Capital account.

Additional Paid-In Capital = 10 shares x ($5 - $3)
Additional Paid-In Capital = 10 shares x ($2)
Additional Paid-In Capital = $20

Debit to Cash because we are receiving $50 from shareholders for the preferred shares in our company, and assets (Cash) have a normal debit balance.

Credit to Preferred Stock because we've created $30 worth of par preferred stock, and equity accounts (Preferred Stock) have a normal credit balance.

Credit to Additional Paid-In Capital because we've created $20 worth of extra capital beyond par preferred, and equity accounts (Additional Paid-In Capital) have a normal credit balance.