Definition: A stock subscription is a contract requiring an investor to purchase a set number of unissued shares from the corporation at a future date for a specific price. In other words, it’s a legal agreement between and investor and the company that allows the investor to continue to purchase shares from a company over a period of time or at a future date.
What Does Stock Subscription Mean?
Stock subscriptions are often given to management and employees for the same reason that corporations tend to offer stock options to key staff members. Both the company and the employees typically benefit from this arrangement. By giving managers a stake in the company, the employees are more likely to stay with the company, focus on improving performance, and accomplish long-term goals. Since employees are constantly purchasing stock over a period of time, the company also gets a steady inflow of cash.
The employees not only have a chance to purchase an ownership share in the company, they also can negotiate a purchase agreement over time. This is particularly common with company buyouts and ownership transitions where an employee is slowing purchasing all the stock of the company as current owner retires.
Accounting for subscriptions is simple. When a subscription is offered, a receivable account is created to track the stock purchases over time. Let’s take a look at an example.
Clyde, Inc. is owned 100 percent by Clyde, Sr. He is getting ready to retire and is passing on the company to his son, Clyde, Jr. As a result, Jr. has been offered a stock subscription to purchase 50,000 shares at $1 per share. Clyde, Inc. would record the stock subscription journal entry by debiting the subscription receivable account and crediting the common stock subscribed account for $50,000.
When Jr. purchases the shares, the cash account is debited for the cash received and the subscriptions receivable account is credited. Also, the common stock subscribed account is debited while the common stock account is credited for the same amount.