Stock Option Compensation Expense

The offset to stock option compensation expense is an increase in paid-in-capital. My understanding is that we do this to offset the expense amount that reduced the retained earning. If not,can someone please explain this?

Generally, when we book an expense, we debit the expense (income statement) and credit either cash or accounts payable (a liability). Stock compensation expense is a little unique - to make the balance sheet balance, you obviously arent reducing cash (because you arent paying any cash) and accounts payable wouldnt really work either (because the awards arent being settled in cash, so the company isnt really paying anything). So basically, the place you have to record the credit to is to paid in capital, with the thinking being its a stock-based transaction, and therefore impacting the capital accounts is logical.

Thanks a lot. It makes senseā€¦