Capital Stock

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 to meet its various business goals.

Capital Stock Types 

It can be divided into the following types:

Capital Stock Formula

The formula for calculating capital stock in the balance sheet is as follows:

Capital Stock = Number of Shares Issued * Par Value Per Share

It is calculated by multiplying the number of shares issued with the par value per sharePar Value Per SharePar value of shares is the minimum share value determined by the company issuing such shares to the public. Companies will not sell such shares to the public for less than the decided value.read more.

Capital-Stock

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Examples of Capital Stock in the Balance Sheet

Let us understand the method of calculation by way of examples.

You can download this Capital Stock Excel Template here – Capital Stock Excel Template

Example #1

A company issued 5,000 shares at $6 per share, having a par value of $5 each.

Solution

Calculation of Capital Stock

Capital Stock Example 1
  • = 5,000 * 5
  • = $25,000

Example #2

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;

Solution

Calculation of Capital Stock

Example 1.1
  • = 6,000*10 + 7,000*8
  • = $1,16,000

Advantages

The following are the advantages which are listed below:

Disadvantages 

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 make major decisions in the company. It may be serious trouble in case of disagreement with the stockholders.

This article 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 –