Authorized stock, also known as authorized shares or authorized capital stock, plays a crucial role in the accounting and financial operations of a corporation. It refers to the maximum number of shares that a company is legally allowed to issue based on its articles of incorporation or charter. While authorized stock is listed in the capital accounts section of the balance sheet, it should not be confused with outstanding shares, which are the shares that the company has actually issued and are held by the public.
The number of authorized shares determines the total number of shares that can be traded on the open market. This includes both shares available for trading (float) and shares reserved for employee compensation and incentives (restricted shares). If a company issues all of its authorized stock, the outstanding shares will be equal to the authorized shares, while the difference between authorized shares and outstanding shares represents what the company retains in its treasury.
Companies often keep a portion of their authorized shares unissued to maintain flexibility in offering and selling additional shares in the future to raise funds. Holding unissued authorized shares can also aid in maintaining control and preventing hostile takeovers.
An example of authorized stock is Amazon, which has 5 billion authorized shares of common stock and 500 million authorized shares of preferred stock in its corporate charter.
Key Takeaways:
- Authorized stock refers to the maximum number of shares a corporation is legally allowed to issue.
- It is different from outstanding shares, which are the shares actually issued and held by the public.
- Authorized shares determine the total number of shares available for trading and include both float and restricted shares.
- Companies may keep unissued authorized shares for future fundraising and to maintain control.
- A case in point is Amazon, with 5 billion authorized shares of common stock and 500 million authorized shares of preferred stock.
Types of Authorized Shares
Authorized shares can include different types of shares, such as common shares, preferred shares, and restricted shares. Each type of share represents a unique ownership interest in the company and carries specific rights and privileges for shareholders.
Common shares, also known as ordinary shares, are the most common type of authorized shares. They represent equity ownership in a corporation and give shareholders the right to claim a portion of the company’s earnings and participate in decision-making through voting rights.
“Common shares represent equity ownership in a corporation and give shareholders the right to claim a portion of the company’s earnings and participate in decision-making through voting rights.”
Preferred shares, on the other hand, have priority over common shares in terms of assets and earnings distribution. While preferred shareholders may not have voting rights, they often receive preferential treatment when it comes to dividends and may have the option to convert their shares into common shares.
“Preferred shares have priority over common shares in terms of assets and earnings distribution. While preferred shareholders may not have voting rights, they often receive preferential treatment when it comes to dividends and may have the option to convert their shares into common shares.”
Restricted shares are typically granted to corporate officers, directors, and senior executives as part of their compensation packages. These shares may be subject to certain restrictions, such as continued employment or achieving specific financial goals. Restricted shares serve as a motivation tool and can provide voting rights to employees.
“Restricted shares are typically granted to corporate officers, directors, and senior executives as part of their compensation packages. These shares may be subject to certain restrictions, such as continued employment or achieving specific financial goals. Restricted shares serve as a motivation tool and can provide voting rights to employees.”
| Type of Authorized Share | Definition | Rights and Privileges |
|---|---|---|
| Common Shares | Represent equity ownership in a corporation | Claim a portion of earnings, voting rights |
| Preferred Shares | Have priority over common shares | Preference in dividends, potential conversion to common shares |
| Restricted Shares | Granted to executives, subject to restrictions | Ownership motivation, voting rights |
Accounting for Authorized Stock
When it comes to accounting for authorized stock, companies need to keep a close eye on their balance sheets. This involves tracking the authorized shares, outstanding shares, and any unissued shares. Outstanding shares refer to the shares that have been issued to the public and held by shareholders, while any unissued authorized shares are retained in the company’s treasury.
For example, Amazon’s corporate charter specifies 5 billion authorized shares of common stock and 500 million authorized shares of preferred stock. These numbers give investors an idea of the company’s potential for issuing additional shares and the potential for dilution.
Understanding the difference between authorized shares and outstanding shares is crucial for investors. A larger difference indicates a greater potential for dilution, which can impact ownership percentage and earnings per share. This knowledge assists investors in making informed decisions regarding their stock holdings.
In conclusion, accounting for authorized stock involves careful monitoring of authorized shares, outstanding shares, and unissued shares. By keeping track of these numbers, companies can maintain accurate financial records and provide transparency to shareholders and investors.
FAQ
What is authorized stock?
Authorized stock, also known as authorized shares or authorized capital stock, refers to the maximum number of shares that a corporation is legally allowed to issue as specified in its articles of incorporation or charter.
How is authorized stock different from outstanding shares?
Authorized stock is the maximum number of shares a company can issue, while outstanding shares are the shares that have actually been issued and are held by the public.
What determines the total number of shares that can be traded?
The number of authorized shares determines the total number of shares that can be traded on the open market. This includes both shares available for trading (float) and shares reserved for employee compensation and incentives (restricted shares).
What happens if a company issues all of its authorized stock?
If a company issues all of its authorized stock, the outstanding shares will be equal to the authorized shares.
What is the difference between authorized shares and outstanding shares?
The difference between authorized shares and outstanding shares is what the company retains in its treasury.
Why do companies keep a portion of their authorized shares unissued?
Companies often keep a portion of their authorized shares unissued to have the flexibility to offer and sell more shares in the future for raising additional funds.
How can maintaining unissued authorized shares help companies?
Maintaining unissued authorized shares can help companies maintain control and prevent hostile takeovers.
Can you provide an example of authorized stock?
An example of authorized stock is Amazon, which has 5 billion authorized shares of common stock and 500 million authorized shares of preferred stock in its corporate charter.
What are the different types of authorized shares?
Authorized shares can include different types of shares, such as common shares, preferred shares, and restricted shares.
What is the purpose of common shares?
Common shares represent equity ownership in a corporation and give shareholders the right to claim a portion of the company’s earnings and participate in decision-making through voting rights.
How are preferred shares different from common shares?
Preferred shares have priority over common shares in terms of assets and earnings distribution. They also do not have voting rights but often come with additional features like preference in dividends and conversion to common shares.
What are restricted shares?
Restricted shares are granted to corporate officers, directors, and senior executives and are subject to certain restrictions, such as continued employment or achieving specific financial goals. They provide motivation and voting rights to employees.
How is authorized stock accounted for?
Accounting for authorized stock involves keeping track of the authorized shares, outstanding shares, and any unissued shares in a company’s balance sheet.
What are outstanding shares?
Outstanding shares are the shares that have been issued to the public and held by shareholders.
How do companies retain unissued authorized shares?
Any unissued authorized shares are retained in the company’s treasury.
Can you provide more examples of authorized shares?
Examples of authorized shares can vary depending on individual companies, such as Amazon’s corporate charter that specifies 5 billion authorized shares of common stock and 500 million authorized shares of preferred stock.
How can investors analyze the potential for stock dilution?
Investors may analyze the potential for stock dilution by considering the difference between authorized shares and outstanding shares. A larger difference indicates a greater potential for dilution, which can affect ownership percentage and earnings per share.
