Share Purchase Journal Entry

Share Purchase is the process that a company invests in the share capital of other entities.

The company can raise the capital by issuing equity or debt security to the capital market. If the company issue debt to the market, they have obligation to pay for the annual interest. Moreover, on the maturity date, the issuer has to pay back the principal amount. it is their obligations that can not be modified.

On the other hand, company can issue equity security such as common stock or preferred stock. It means they sell part of the company to the investors, and they will become the owners of the company. They will enjoy the benefit when company doing good. They will suffer when company is making a loss. The investors will be able to receive the dividend base on the profit and board approval.

Some companies do not need the capital, but they have surplus cash. So instead of putting the cash in the bank, they use it to invest in the other companies for higher profit. The company becomes the investor of the other companies. They may become the creditor if they invest in bonds. They will become the partial owner if they invest in stock.

The company needs to spend cash to purchase these kinds of investments. After purchasing the share, company has to record the marketable security which is the current assets on the balance sheet.

The other companies’ share is also part of the marketable security. So when the company purchases other shares, it has to record this investment as the marketable security.

Journal Entry Share Purchase

When the company purchases the others companies’ share equity, they have to pay cash and receive equity in exchange.

The journal entry is debiting marketable security and credit cash.

Marketable Security is the current asset on the company balance sheet. It will be measured based on the market price on the next reporting date.

Example

ABC is an investment company with a huge surplus of cash at bank. During the month, the management team decided to purchase Amazon shares of $ 20 million. They expect to hold and sell back when the price increase. Please prepare a journal entry for share purchase.

Company purchase shares of other entities, they have to record increases in marketable security and cash paid.

The journal entry is debiting marketable security $ 20 million and credit cash $ 20 million.

The entry increased the marketable security by $ 20 million on the balance sheet and cash decreased by the same amount.