Is Common Stock A Current Asset? How It Is Treated In A Business
The common stock is one of the most important elements of the balance sheet in the equity section that represents the shareholder’s interest and ownership in the company.
Is Common Stock A Current Asset?
Common stocks are the initial investments of the shareholders when they first buy the shares of the company. The common stocks do not come with fixed value because their value is determined by the company’s financial performance
Common stocks are not current assets because they are part of the owner’s equity that represents the ownership of the shareholders in the company other components of the owner’s equity are share premium, share capital, retained earnings, etc.
The section of owner’s equity in the balance sheet looks like this.
| Owner’s Equity: | |
| Common Stock | xxx |
| Share Premium | xxx |
| Share premium | xxx |
| Retained Earnings | xxx |
| Other Component Of Owner’s Equity | xxx |
| Total Owner’s Equity | xxx |
Why Common Stocks Are Important For A Company
Common stocks play an essential role in the emergency situation and also help in the company’s growth. The followings are the major reasons why common stocks are important for a company.
- Common stocks play a vital role in the capital generation
- It helps in the distribution of power among the shareholders
- It helps in managing debt and equity financing based on the company’s needs and market situation
- Common stocks bring more investors as these are easy to liquidate, etc.
FAQs
What is the simple definition of common stock?
Common stock is the investment portion that represents the rights and ownership of the shareholders in the company.
What is an example of common stock?
Suppose you purchase 30% shares in a company, after paying all the debts and expenses you will get 30% of the profit or cash generated by the business operations such as sales or other investments.
Is common stock a current asset or a liability?
Common stock is neither a current asset nor it is an obligation for a company. Common stock is the investment of shareholders that shows their ownership in the company.
What type of asset is common stock?
Common stock is a kind of marketable securities that are acquired to show interest in the company and they are recorded in the section of owner’s equity.