How to Present Capital Stock on the Balance Sheet

Capital stock represents the funds a company raises by issuing ownership shares to investors. This capital is a foundational element of a company’s financial structure and is presented within the Stockholders’ Equity section of the balance sheet.

Core Components of Capital Stock

The most prevalent type of capital stock is common stock, which represents the primary form of ownership in a corporation. Holders of common stock typically have voting rights, allowing them to influence corporate decisions, such as electing the board of directors. This class of stock signifies a residual claim on the company’s assets after all liabilities and other equity holders have been paid.

A company may also issue preferred stock, a separate class of ownership that carries different rights. Preferred stockholders usually have priority over common stockholders in receiving dividend payments and in the distribution of assets if the company liquidates. In exchange for this priority, preferred shares typically do not come with voting rights.

All shares, whether common or preferred, are assigned a par value, which is a nominal value established in the company’s articles of incorporation. This value is a historical legal concept and has no direct relationship to the stock’s market price. Companies often set the par value at a very low amount, such as $0.01, to satisfy statutory requirements.

When shares are sold to investors for more than their par value, the excess amount is recorded in an account called Additional Paid-In Capital (APIC). This account captures the premium that investors pay above the nominal par value. For instance, if a company issues a share of stock with a $0.01 par value for a market price of $20, the par value of $0.01 is recorded in the common stock account, and the remaining $19.99 is recorded as APIC.

Understanding Share Status

A company’s corporate charter specifies the number of authorized shares, which is the maximum number of shares the corporation is legally allowed to issue. This figure can only be changed by a vote of the shareholders. From this authorized pool, the company sells a certain number of issued shares to investors to raise capital.

The shares currently held by all investors, including the public, insiders, and institutional owners, are known as outstanding shares. The number of issued shares and outstanding shares is often the same, but they can differ if the company repurchases some of its own stock from the market.

Shares that a company issues and later buys back from the open market are called treasury stock. These shares are no longer outstanding and do not have voting rights or receive dividends. On the balance sheet, treasury stock is not an asset; instead, it is recorded as a contra-equity account, which reduces total stockholders’ equity. Companies may repurchase shares to signal confidence that the stock is undervalued or to offset dilution from employee stock option plans.

Presentation on the Balance Sheet

The Stockholders’ Equity section of the balance sheet presents the different components of capital stock. The presentation follows Generally Accepted Accounting Principles (GAAP), which requires separate line items for each component to provide transparency to investors and creditors.

The presentation begins with contributed capital, which is the capital paid in by stockholders. This includes a line for preferred stock, if any, followed by common stock. The common stock line item is calculated by multiplying the par value per share by the number of shares issued, with the aggregate amount received above par value recorded as Additional Paid-In Capital.

After summing the stock accounts and APIC, other equity items are included. Retained earnings, which are the cumulative profits the company has reinvested in the business, are added. From this subtotal, the cost of any treasury stock held by the company is subtracted. For example, if a company has $5,000 in common stock (500,000 shares at $0.01 par), $9,995,000 in APIC, and $2,000,000 in retained earnings, its subtotal equity is $12,000,000. If it then repurchased shares for $500,000, that amount would be subtracted, resulting in a Total Stockholders’ Equity of $11,500,000.