Record a journal entry that debits “compensation expense” (this expense is reported in the income statement) and credits “additional paid in capital – stock options” (a stockholder’s equity account reported in the balance sheet). Common stock is the main class of stock that the company issues to investors. The remaining credit is made to “additional paid-in capital in excess of par (common stock)” for the amount needed to balance the journal entry. Since the number of outstanding shares is incorporated into key calculations of financial metrics such as earnings per share and because this number is so subject to variation over time, the weighted average of outstanding shares is often used in its stead in certain formulae. Eileen Rojas holds a bachelor's and master's degree in accounting from Florida International University. When the options are exercised or expire, the related amounts will be reported in accounts that are part of the stockholder’s equity section of the balance sheet. Stock option expensing is a method of accounting for the value of share options, distributed as incentives to employees, within the profit and loss reporting of a listed business. Often times, if a company considers its stock to be undervalued, it will institute a repurchase program, buying back shares of its own stock. Apple. If a stock option is not exercised on its exercise date, it will expire or sometimes only some of the shares offered by the option are purchased. Employee Stock Options Outstanding account – It is a part of the Shareholders equity and is transferred to Share Capital, Share Premium or General Reserves. Accessed July 30, 2020. The number of shares outstanding will increase if a company undertakes a stock split, or will reduce if it undertakes a reverse stock split. It excludes closely held shares, which are stock shares held by company insiders or controlling investors. Outstanding shares are shown on a company’s balance sheet under the heading “Capital Stock.” The number of outstanding shares is used in calculating key metrics such as a company’s market capitalization, as well as its earnings per share (EPS) and cash flow per share (CFPS). The number of shares outstanding increases when a company issues additional shares or when employees exercise stock options Stock Option A stock option is a contract between two parties which gives the buyer the right to buy or sell underlying stocks at a predetermined price and within a specified time period. Deferred employee compensation will appear in the Balance Sheet as a negative item as part of net worth or share holders equity. In the above example, if the reporting periods were each half of a year, the resulting weighted average of outstanding shares would be equal to 150,000. Balance sheet presentation: Both common and preferred stock are reported in the stockholders’ equity section of the balance sheet. The former would result in an EPS of $1, while the latter would result in an EPS of $2. If the options expire, the balance in the “additional paid in capital – stock options” account needs to be transferred to “additional paid in capital – expired stock options” account. The current market value of the stock is $75. For a blue chip stock, the increased number of shares outstanding due to share splits over a period of decades accounts for the steady increase in its market capitalization and concomitant growth in investor portfolios. As an example, the online video streaming service Netflix, Inc. announced a seven-for-one stock split in 2015. But it remains unclear which of the two variant outstanding share values to incorporate into the equation: 100,000 or 200,000. 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