Stockholders' Equity: Classes of Capital Stock

The corporation

Capital stock authorized and outstanding

The corporate charter states the number of shares and the par value, if any, per share of each class of stock that the corporation is permitted to issue. Capital stock authorized is the number of shares of stock that a corporation is entitled to issue as designated in its charter.

A corporation might not issue all of its authorized stock immediately; it might hold some stock for future issuance when additional funds are needed. If all authorized stock has been issued and more funds are needed, the state of incorporation must consent to an increase in authorized shares.

The authorization to issue stock does not trigger a journal entry. Instead, companies note the authorization in the capital stock account in the ledger (and often in the general journal) as a reminder of the number of shares authorized. Capital stock issued is the number of shares of stock sold and issued to stockholders.

Capital stock outstanding is the number of authorized shares of stock issued and currently held by stockholders. The total ownership of a corporation rests with the holders of the capital stock outstanding. For example, when a corporation authorized to issue 10,000 shares of capital stock has issued only 8,000 shares, the holders of the 8,000 shares own 100 percent of the corporation.

Each outstanding share of stock of a given class carries rights and privileges identical to any other outstanding share of that class. Shares authorized but not yet issued are referred to as unissued shares (the previous example had 2,000 unissued shares). No rights or privileges are attached to these shares until they are issued; they are not entitled to dividends, nor can they be voted at stockholders' meetings.

The number of shares issued and the number of shares outstanding may be different. Issued stock has been issued at some time, while outstanding shares are currently held by stockholders. All outstanding stock is issued stock, but the reverse is not necessarily true. The difference is due to shares returned to the corporation by stockholders; it is called treasury stock. Chapter 13 discusses treasury stock.

An accounting perspective:

Business insight

SCI Systems, Inc., designs, manufactures, and distributes electronic products for a wide variety of industries. The following illustration is adapted from the company's balance sheet. The stockholders' equity section shows the actual number of shares of common stock authorized and outstanding and shows the dollar amounts in thousands:

June 30 2001 2000
Common stock, USD0.10 par value; authorized
500,000,000 common shares, issued 147,132,428 shares in 2001 and 144,996,374 shares in 2000.
USD 14,713 USD 14,500