Capital Stock Definition
The capital stock is the total amount of share capital (including equity capital and preference capital) that has been issued by a company and the same can be found in the balance sheet in the column of “shareholder’s equity”. It is a means of raising funds by the company in order to meet its various business goals.
Capital Stock Types
It can be divided into the following types:
- Authorized = Authorized Capital represents the maximum amount of share capital that a company can issue, as mentioned in its legal charter. It can be altered by making changes to its legal charter after following prescribed procedures.
- Issued = It means the total amount of share capital that is presently issued by the company out of its authorized capital stock. It is worthy to note that issued capital cannot exceed the authorized capital stock.
- Unissued = It reflects the part of authorized capital stock that the company has not issued yet.
- Outstanding = It means those issued shares which are still held by the stockholders (i.e. those shares which are not bought back by the company)
- Treasury Shares =Treasury Shares means those issued shares which are bought back by the company.
Capital Stock Formula
The formula for calculating capital stock in the balance sheet is as follows:
It is calculated by multiplying the number of shares issued with the par value per share.
Examples of Capital Stock in Balance Sheet
Let us understand the method of calculation by way of examples.
A company issued 5,000 shares at $6 per share, having a par value of $5 each.
Calculation of Capital Stock
- = 5,000 * 5
- = $25,000
A company has issued equity as well as preference shares as follows-
- 6,000 equity shares issued at par value of $10 each.
- 7,000 preference shares issued at par value of $8 each.
Calculation of Capital Stock
- = 6,000*10 + 7,000*8
- = $1,16,000
The following are the advantages which are listed below:
- The company’s dependence on outside debt is reduced.
- The company is free to use the funds for as long as it needs while in case it opts for taking outside loans it will need to repay it after a certain fixed period of time.
- It shows the trust of the investors in the company and thus increases its credibility.
- Unlike in the case of debt financing, the investors need not be paid fixed income every year. A company can pay dividends according to its financial condition.
- There is freedom for the company to use the funds as per its goals without any restrictions.
The following are the disadvantages which are listed below:
- The dividend that the company pays is not a tax-deductible expense.
- The control of the company is diluted when it is issued.
- The company is subjected to various laws and regulations when it issues it and thus is complicated than taking a loan for instance.
- The approval of stockholders is required to take major decisions in the company. This may be serious trouble in case of disagreement with the stockholders.
This has been a guide to Capital Stock and its definition. Here we discuss the formula for calculation capital stock in balance sheet along with practical examples, advantages & disadvantages. You can learn more about financing from the following articles –