Why is common stock not considered an asset? Isn't the company gaining value from it?

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Expert Solution

Common Stock is shown under Stockholder's Equity in a balance sheet. When a company issues common stock what it does is it sells ownership in the company. When an investor would purchase the common stock he would gain some ownership in the company. Therefore when a common stock is issued, Stockholder's equity gets credited and at the same time Cash increases as the investor is giving up cash for acquiring shares.

Reason why a company issues common stock is to raise capital for starting or growing their business.

For a company that issues common stock the issue will be considered as Equity but for the investors acquiring the shares such acquisiton will be Investments and this Investment will be reflected in their asset side. Therefore even though the company is gaining value from the issuance of common stock in the form of cash, Common Stock will be considered as an Equity and not an Asset.

ekkarill92 answered 1 year ago

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