Stock Based Compensation Journal Entries

Stock-based compensation involves granting employees equity in the form of stock options, restricted stock units (RSUs), or shares as part of their compensation package. This type of compensation is recognized as an expense in the financial statements, and specific journal entries are made to account for the issuance and vesting of the stock-based awards.

Example 1: Recording Stock-Based Compensation Expense for Stock Options

Assume a company grants stock options to employees on January 1, 2024, with a total fair value of $100,000. The options vest over four years.

Journal Entry to Record Annual Stock-Based Compensation Expense:

Date	Account Title	Debit ($)	Credit ($)
12-31-2024	Stock-Based Compensation Expense	25,000
12-31-2024	To Additional Paid-in Capital – Stock Options		25,000

Explanation:

• Stock-Based Compensation Expense is debited to recognize the expense related to the stock options for the year.
• Additional Paid-in Capital – Stock Options is credited to reflect the equity component of the compensation.

This entry would be repeated annually for the four-year vesting period, adjusting the amount based on the expense recognized each year.

Example 2: Recording the Exercise of Stock Options

Suppose an employee exercises their stock options on December 31, 2026, purchasing 1,000 shares at the exercise price of $10 per share. The total cash received is $10,000.

Journal Entry to Record the Exercise of Stock Options:

Date	Account Title	Debit ($)	Credit ($)
12-31-2026	Cash	10,000
12-31-2026	Additional Paid-in Capital – Stock Options	25,000
12-31-2026	To Common Stock (1,000 shares @ $1 par)		1,000
12-31-2026	To Additional Paid-in Capital		34,000

Explanation:

• Cash is debited to record the cash received from the employee for exercising the options.
• Additional Paid-in Capital – Stock Options is debited to remove the stock option value from the equity account.
• Common Stock is credited to recognize the par value of the shares issued.
• Additional Paid-in Capital is credited to reflect the excess amount over the par value received from the exercise.

Example 3: Restricted Stock Units (RSUs)

Assume a company grants 1,000 RSUs to an employee on January 1, 2024, with a fair value of $50 per share. The RSUs vest over two years.

Journal Entry to Record Annual Stock-Based Compensation Expense for RSUs:

Date	Account Title	Debit ($)	Credit ($)
12-31-2024	Stock-Based Compensation Expense	25,000
12-31-2024	To Additional Paid-in Capital – RSUs		25,000

Explanation:

• Stock-Based Compensation Expense is debited to recognize the expense related to the RSUs for the year.
• Additional Paid-in Capital – RSUs is credited to reflect the equity component.

Journal Entry to Record Vesting and Issuance of RSUs (after two years):

Date	Account Title	Debit ($)	Credit ($)
12-31-2025	Additional Paid-in Capital – RSUs	50,000
12-31-2025	To Common Stock (1,000 shares @ $1 par)		1,000
12-31-2025	To Additional Paid-in Capital		49,000

Explanation:

• Additional Paid-in Capital – RSUs is debited to remove the RSU value from the equity account.
• Common Stock is credited to recognize the par value of the shares issued upon vesting.
• Additional Paid-in Capital is credited to reflect the excess value over the par value.

Example 4: Forfeiture of Stock Options

If an employee leaves the company before their stock options vest, the options may be forfeited.

Journal Entry to Reverse Stock-Based Compensation Expense for Forfeited Options:

Date	Account Title	Debit ($)	Credit ($)
12-31-2025	Additional Paid-in Capital – Stock Options	10,000
12-31-2025	To Stock-Based Compensation Expense		10,000

Explanation:

• Additional Paid-in Capital – Stock Options is debited to reverse the equity component of the compensation.
• Stock-Based Compensation Expense is credited to reverse the previously recognized expense due to the forfeiture.

These examples illustrate how different types of stock-based compensation are accounted for, including the recognition of expenses, the exercise of options, and the issuance of shares upon vesting. Each type of stock-based compensation has specific journal entries that must be recorded to accurately reflect the transactions in the financial statements.