Journal entries provide foundational information for all financial reporting and are used by auditors to analyze the appropriateness of transactions recorded in ledger and how such financial transactions impact a business. Companies are required to record transactions to ledger in accordance to their Financial Reporting Method. Below is a list of Journal Entries Carta provide to assist with recording your stock-based compensation transactions as ease:
Recognize current period Stock-based Compensation Expense
To appropriately record expenses and ensure transactions flow through to the related Financial Statements - we debit Stock Compensation Expense (Income Statement) and Additional Paid-in Capital (Balance Sheet).
Record receivables from early exercised options:
As early exercised options are still subject to vesting, the shared (though exercised) is not considered issued. The cash received from the early exercise represents proceeds from the issuance of an equity instrument and theoretically would be classified as a Financing Activity (presented in Statement of Cash Flow), which are typically accounted for in the Balance Sheet as a Liability. As such, cash proceeds are to be considered Cash Liability and relieved over time as Share Vests (which will be covered in “Record early exercised options as Share Vests).
Record early exercised options as Share Vests
Cash Liability previously recognized from early exercise transaction are evaluated for previously unvested shares that have now vested. As the unvested early exercise shares vest, we debit Cash Liability and APIC (reversal of previously recorded APIC from expense recognition only for shares exercised).
Record options exercised (non-early exercise)
Upon exercising of option, we debit Cash and APIC (reversal of previously recorded APIC from expense recognition only for shares exercised).
Record APIC Excess of Par and Commons Stock (Par Value)
To complete the journal entry resulting from early exercise and non-early exercise options, we must credit to Common Stock (Par Value) and APIC - Excess of Par. Par Value is currently prefilled as $0.0001 within “Common Stock (Par Value)’s formula). APIC - Excess of Par is the difference between total cash raised less Par value for the related shares.
Please note that if your par value is not $0.0001, you may modify Credit formula (image below) for Common Stock (Par Value).