How to Expense Employee Stock Options (3 Steps)

Debit 'Compensation Expense' and credit 'Additional Paid-In Capital for Stock Options' to record granting the stock options. The expense should be matched to the work completed. In our example, debit 'Compensation Expense' $50,000 and credit 'Additional Paid-In Capital for Stock Options' $50,000. Repeat this entry for each year. The amount is $50,000 instead of $150,000 because the stock options are for three years of compensation, so $150,000 divided by 3 years equals $50,000 per year.
Record the journal entry for exercising the stock option, if they are exercised. Debit 'Cash Received' and 'Additional Paid-In Capital for Stock Options.' 'Cash Received' equals the amount of cash received for the stock, $500,000 in the example and 'Additional Paid-In Capital for Stock Options' equals the amount first recorded, $150,000 in the example. Credit 'Common Stock' by the par value times the number of stock issued, $50,000 in the example, and 'Additional Paid-in Capital in Excess of Par' by the amount needed to balance the journal entry, $600,000 in the example.
Record the journal entry to record the expiration of the options if they expire. Debit 'Additional Paid-In Capital for Stock Options,' $50,000 in the example, and credit 'Additional Paid-In Capital for Expired Stock Options,' $50,000.