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Home » Accounting Tutorials » Shareholders Equity Tutorials » Capital Stock

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

  • 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:

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 share.

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Capital Stock

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:

  • 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.
  • 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.

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.

Recommended Articles

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 –

  • List of Careers in Capital Market
  • Stockholder Formula
  • Contributed Capital Formula
  • Shares Premium Account
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