Share capital (Best Overview: Definition, Types And Comparisons)

What is share capital?

What are the different types of share capital?

How is it different from paid-up capital or authorized capital?

We will look at what is share capital, its accounting and legal definition, the different types of share capital, compare it with paid-up capital and authorized capital, see how it is reported on the balance sheet, look at concrete examples and more.

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What is share capital

Share capital (capital stock, contributed capital or equity capital) represents the sum of money a corporation has raised by issuing common stock or preferred stock or other types of equity securities.

Most often, a company receives cash in exchange for issuance shares.

However, the share capital can represent the value of either cash or any other consideration received by the corporation.

Share capital does not include the value of redeemed shares, treasury shares or reserved stocks for future issuance.

It includes securities that have effectively been issued to shareholders and are in circulation and outstanding. 

Over time, the share capital of a company can increase or change as the company issues additional securities to shareholders. 

From an accounting perspective, companies must report how much money they received by issuing common or preferred stock on their balance sheet.

In the shareholder’s equity section of the financial statement, you will typically find the following line items or accounts:

  • Common stock capital
  • Preferred stock capital
  • Additional paid-in capital 

These line items combined represent a company’s equity share capital.

The term “share capital” has a particular meaning to lawyers and a slightly different meaning to accountants.

Let’s look at the legal definition of share capital followed by the accounting definition.

Share capital definition can be summarized as either:

  • The total amount of money or consideration a company receives by selling securities
  • The composition of the different types of securities outlined in a company’s constituting documents

From a legal point of view, a company’s share capital may be composed of:

  • Common stocks
  • Preferred stocks
  • Class A
  • Class B
  • Class C
  • Other securities 

From an accounting point of view, share capital represents the amount of money a company receives for issuing securities as reported on its financial statements.

Share capital accounting definition

According to Investopedia, in accounting terms, share capital can be defined as follows:

It means the total amount raised by the company in sales of shares.
Author

In accounting terms, share capital represents the total sum a company received in exchange for issuing equity securities to shareholders. 

Whenever a company sells stocks, it must record the amount it receives in its share capital.

The share capital is recorded in the company’s financial statements when the stocks are issued for the first time only. 

Future transactions on the same issued and outstanding stock will no longer be accounted for or recorded in the company’s financial statements.

Share capital types 

What are the different types of share capital?

In this section, we will differentiate the following:

  • Authorized capital
  • Issued capital
  • Registered capital

Authorized capital 

The authorized capital (or authorized share capital) represents the maximum amount of money a company can receive in issuing certain types of stock

For example:

Corporation A is authorized to raise up to a maximum authorized capital of $10,000,000 by issuing preferred stocks having a par value of $1 per stock.

In other words, the company is authorized to issue up to 10,000,000 preferred stocks allowing it to raise up to a maximum of $10,000,000 in authorized capital.
Author

Issued capital 

Issued capital (or issued share capital) represents the number of shares or stocks a company actually issued to shareholders.

For example:

Corporation A is authorized to raise up to a maximum authorized capital of $10,000,000 by issuing preferred stocks having a par value of $1 per stock.

Company A issues 500,000 preferred stocks in total having a total par value of $500,000.

In other words, out of the total authorized share capital of $10,000,000, the company has an issued capital of $500,000.
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Registered capital

Registered capital is an alternative way of referring to authorized capital.

It represents the total amount of capital a company is authorized to receive by issuing stocks as permitted by its articles of incorporation.

Share capital vs paid-up capital 

What is the difference between share capital and paid-up capital?

This can be confusing to many so let’s clarify it.

Share capital represents the total value received by a company in exchange for issuing equity stocks to shareholders or investors. 

Paid-up capital is the value of the securities in excess of the par value (or premium) that is reported by a company in its financial statements.

Let’s look at an example to understand this.

Company A has sold 100,000 common stocks at a fair market value of $20 per share and having a par value (or nominal value) of $1 per share.

For the issuance of the common stocks, Company A actually receives $2,000,000 in cash and for common stocks having a par value of $200,000.

– Share capital common stocks: $200,000
– Paid-up capital common stocks: $1,800,000

Company A has also sold 20,000 preferred shares at a market value of $50 per share having a par value of $10 per share.

For the issuance of the preferred stock, Company A actually receives $1,000,000 in cash for preferred stocks having a par value of $200,000.

– Share capital preferred stocks: $200,000
– Paid-up capital preferred stocks: $1,800,000

In total, Company A will report the following on its balance sheet for all the securities issued (common stocks and preferred stocks in our example):

– Common stock share capital: $200,000
– Preferred stock share capital: $200,000
– Total paid-up capital: $2,600,000
Share capital: $3,000,000
Author

As a result, share capital represents the total funds raised by the company for issuing stocks and the paid-up capital represents the value received by the company in excess of the stock nominal value.

Authorized capital vs share capital 

A corporation’s authorized capital is the maximum value it can receive by issuing shares to shareholders in accordance with its articles of incorporation.

In legal terms, share capital represents the different types of securities a company is authorized to issue such as common stocks, preferred stocks, Class A stocks or other variations.

In accounting terms, share capital represents the total consideration or value received by a company by issuing shares or equity stock to shareholders.

Reporting of share capital 

Typically, companies report share capital on their balance sheet in the “shareholder’s equity” section.

When common shares are issued, the corporation will report the par value of the said shares in its financial statements to show the nominal value it received for issuing the shares.

The “par value” is an arbitrary amount that is allocated to the common shares (example: $1 or $10) and does not represent the “market value” or “fair market value”.

On the balance sheet (in the shareholder’s equity section), you are likely to see two line items:

  • One line item showing the par value of the common stocks issued
  • A second line item showing the par value of the preferred stocks issued.

You’ll also have a third line item for additional paid-up capital or contributed surplus.

“Additional paid-up capital” or “contributed surplus” is the difference between the actual value for which the common shares were issued and its par value.

Let’s look at an example to make sense of all of this.

Mary agrees to purchase 100 common shares of Company A at a total fair market value of $10,000.

The par value of the common shares is $10 per share.

On its balance sheet, the company will report:

– $1,000 as “common stock share capital” ($10 par value per share X 100 shares purchased)
– $9,000 as additional paid-up capital ($10,000 fair market value – $1,000 par value)
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Share capital example

To enhance our understanding of share capital, it’s worth looking at a concrete example.

Let’s say Company ABC is looking to purchase a new production plant at a cost of $10,000,000.

Company ABC will issue preferred shares to fund the purchase of this plant.

As a result, it issues 100,000 preferred shares at $100 per share to investors representing the market value of the preferred shares. 

The preferred shares are assigned a par value of $10 per share.

The company will now need to report the $10,000,000 investment of cash on its balance sheet.

On the “asset” side of the balance sheet, the company records “cash” for $10,000,000.

On the “equity” side of the balance sheet, the company records “share capital” of $10,000,000 for this transaction composed of $1,000,000 in par value and $9,000,000 in contributed surplus or premium paid by investors over and above the par value of the shares.

Share capital FAQ

Share capital FAQ

What does share capital mean

When stocks are issued, the par value is typically reported as a line item on the balance sheet and the difference between the actual issue price (or premium) and the par value is reported as the additional paid-in capital.

Companies have an obligation to report the par value and additional paid-up share capital when the securities are first issued by the company (primary market issuance).

Future transactions in the secondary market on the issued stocks are no longer recorded by the company in its financial statements.

What is paid-up capital

Paid-up capital or paid-in capital or even contributed capital is a measure of how much money shareholders have invested in a company since the company’s incorporation in exchange for an equity position.

For example:

A company needs $5,000,000 to expand its distribution capabilities.

It raises $5,000,000 by issuing 100,000 common shares at $50 per share having a par value of $10.

The company will record the receipt of $5,000,00 on its balance sheet as “cash” and will also record $5,000,000 in the share capital account.

Within the share capital account, the paid-up capital will show a par value of $1,000,000 and an excess capital of $4,000,000.
Author

What is authorized capital

Authorized capital is the total amount a corporation is authorized to receive in exchange for issuing shares to investors. 

For example, a company may be authorized to issue up to $10,000,000 of common shares to investors. 

If the company issues $2,000,000, then you can say that the company has a share capital of $2,000,000 and a remaining authorized capital of $8,000,000.

What is the difference between share capital and paid-up capital

Paid-up capital represents the value (or actual value) received by a company for selling its shares in the primary market in excess of the par value (or nominal value) of the shares issued. 

Share capital represents the value received by a company in exchange for issuing any type of equity stocks such as common shares or preferred shares.

Is share capital an asset

Share capital is not necessarily an asset but it is an accounting or reporting of share par value and premium received by a company.

When a company issues ordinary shares, common stocks or other forms of capital shares, the company typically receives cash in exchange for the securities issued.

For the company, the cash it receives from a shareholder is an asset that must be recorded in its financial statements in the ordinary share capital account.

For the shareholder, the stocks it receives is an asset as it represents a percentage of ownership in the corporation.

The share capital account is an important line item in a company’s financial statement which includes the par value of the securities issued along with the “paid-in capital” or premium paid by investors and shareholders over and above the par value of the securities issued.

To sum it up, share capital is not an asset per se but the “recording” or “reporting” of it.

What are the types of share capital

There are different types of shares that may potentially be in a company’s share capital such as:

  • Authorized capital (registered capital or nominal capital)
  • Issued capital 
  • Unissued capital 
  • Subscribed capital 
  • Called up capital
  • Uncalled up capital 
  • Paid-up capital 
  • Reserved capital (reserved liability)
  • Fixed capital
  • Circulating capital 

What is the difference between share and share capital

A share is a unit of ownership in a corporation such as “common” shares or “preferred” shares.

Share capital can mean different things in a different context, namely:

  • The different types of classes of shares a company is authorized to issue in accordance with its articles of incorporation such as common shares, preferred shares or other types of equity shares
  • How much money or value a company received for selling shares to investors as recorded on its balance sheet in the shareholder’s equity section (it includes the par value of the shares and the contributed surplus or the value received by the company in addition to the par value)

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