Shares Authorized, Issued, and Outstanding - Online Tutor, Practice Problems & Exam Prep

Authorized shares represent the total number of shares a corporation can sell as stated in its charter. Issued shares are those sold to investors, while outstanding shares are the issued shares still held by investors, excluding any repurchased by the corporation as treasury stock. The relationship can be visualized as concentric circles: authorized shares encompass issued shares, which in turn encompass outstanding shares. Understanding these distinctions is crucial for grasping corporate equity and shareholder dynamics.

Shares Authorized, Issued, and Outstanding

So now let's learn the difference between authorized shares, issued shares, and outstanding shares. So when we talk about shares of common stock, this is the ownership of the corporation, right? Like we've talked about throughout this course, common stock is that equity account. So there are 3 numbers that we use when we talk about common stock. First, we talk about the authorized shares. The authorized shares are the total amount of shares the corporation is allowed to sell according to its charter. So when they first created the corporation, they wrote something in the charter, "Hey, we are allowed to sell a maximum of 20,000,000 shares of common stock and that's the maximum." And it has to be written in the charter and that is going to be the authorized shares. That has nothing to do with how many shares they've actually sold; it's just the total amount that they would ever be able to sell. Okay? So compare that to the next one, issued shares. Well, issued shares are the amount of shares previously sold to investors. So when you sell shares to investors, that is when you have issued shares. Okay? So authorized shares, that's the total amount that you could ever issue, and then you issue shares to the investors. So when you sell them to the public, they become issued shares that are available. Finally, we have outstanding shares. Okay, so there's a small difference between issued and outstanding because outstanding shares are the amount of shares that are still in the hands of the investors. Okay? So what does this mean? How are they still in the hands of the investors? Well, that's because the corporation itself can repurchase its shares from the public and this is called treasury stock. So the difference between issued and outstanding is this treasury stock, and that stock that the corporation itself has repurchased from the public. Okay? So think about it. If Apple stock goes on to Google and they see, oh, what is this price of Apple stock? Whatever the price is, let's say it's $300 a share, well, they can go to the open market just like you or me could buy a share of Apple stock, they can repurchase their shares as well. So they can repurchase shares as treasury stock and we'll talk more about treasury stock in the future. What we want to focus on here is the difference between authorized, issued, and outstanding shares, okay? So what I'm going to do is I'm going to do this artistic rendition to kind of visualize, the difference between these 3. So I never told you before, but I've always dreamed of being a visual artist. I've wanted to paint murals on the wall, have my painting hanging in the Louvre, and this is going to be one of my visual representations here. It's a bit of abstract art, but I think you'll enjoy it. So what we're going to have is what I call the concentric circles of common stock. So let's go ahead and do this. First, we're gonna have this big circle here. Look how good I am. That's a beautiful rendition and this is going to be our authorized stock right there. And then inside this circle, look at this beautiful circle I'm going to draw now. This is going to be our issued shares, and inside that circle, one more circle. Wow. This is beautiful. This is going to be our outstanding shares. Okay. So notice, we authorize a total amount of shares and then we issue some of those authorized shares and then we can repurchase some of those issued shares and what's left is going to be what's outstanding. Obviously, if we haven't repurchased any shares, well then the issued and the outstanding are going to be the same because we haven't repurchased any. So the only difference there would be when we repurchase shares and then we have fewer outstanding shares because there are fewer in the hands of the public. What a beautiful drawing. Let's go ahead and do an example and learn a little bit more about authorized, issued, and outstanding. Cool? Let's do that in the next video.

Shares Authorized, Issued, and Outstanding

Alright. So let's go ahead and see what happens as the company authorizes, issues, and then repurchases some shares. So the founders of ABC Company formalize their corporate charter authorizing a total of 10,000,000 shares. Okay? At this point, when they sign the charter and get everything set up for the corporation, they're not going to make any specific journal entry. There's no journal entry to make when you authorize shares. Maybe you just make a memo, right? A memo of, "Hey, there are 10,000,000 shares authorized" and that's what we have here. We have 10,000,000 shares authorized at this point when we sign the corporate charter. There are no shares issued and no shares outstanding. All we did was sign the corporate charter and that's all that has happened. Nobody's holding any shares of stock.

Next, this could probably happen quite soon after. At this point, now there are shares issued, right? We issued some shares to the founders and we received some cash from the founders. So there's definitely a transaction that happened here and we need to make a journal entry. We would debit cash, because we received cash. So we would debit cash for a 1,000,000 because cash is an asset and we received cash, we debit it for the million and what's the credit here? The credit is going to be to common stock, right? This equity account, common stock because this 1,000,000 is equity of the company owned by the founders here. So the common stock is going to be a credit that increases our equity. Cool? So very simple journal entry, I'm sure we've seen ones like this before.

Notice what's happened now to our shares. There's still 10,000,000 authorized shares in the corporate charter, that hasn't changed. The 10,000,000 is still going to be the authorized shares, but now it says we issued 1,000,000 shares. So there are going to be 1,000,000 shares that are issued and of those 1,000,000 shares, how many are still owned by the public? 1,000,000, right? 1,000,000 shares are owned by the public and you might say, well, the public, these are owned by the founders of the corporation. The corporation and the owners are separate. The corporation is a separate legal entity from the owners. So the corporation itself, only when the corporation owns the stock itself is when we reduce the issued shares and have treasury stock. But in this case, the owners themselves are holding the shares, not the corporation. So that's why our issued and outstanding shares are both 1,000,000.

Finally, at a later date, we're going to see that ABC Company repurchased 50,000 shares of its common stock for 100,000. So remember when the corporation repurchases its stock, this is when we have treasury stock. The corporation is repurchasing its stock and we're going to make an entry like this. There's treasury stock for 100,000, right? And we paid cash for it, so we need to credit cash for the 100,000. Now, without getting into too many details, this treasury stock is not an asset of the corporation. It's a contra equity account. It's an equity account that reduces equity rather than increasing equity with a credit, right? Because we know equity accounts go up with credits. Well, notice, this account, treasury stock has a debit balance. It's actually reducing our equity accounts. It's not an asset. Don't worry about that now, we're going to get into more details about treasury stock in another video.

What I want you to notice now is what's happening with authorized, issued, and outstanding shares. So let me get back out of the way and let's finish this up. How many shares are authorized at this point? It's still 10,000,000, right? The authorized shares are not going to change, it's going to be the 10,000,000 shares that are authorized by the corporate charter. To change the amount of authorized shares, there would need to be an update to the corporate charter and that's not so easy to do. You usually have to talk to the state, file some more paperwork to change those authorized shares. And that would usually only be if you've issued all of your authorized shares and you need more shares. But that's kind of a rare case. So those authorized shares are not going to change, there's still 10,000,000 from the corporate charter. How many are issued now? Well, there's still 1,000,000 issued. Right? Once we issue them to the public, they are going to be counted in our issued shares. And then finally, we repurchased 50,000. So there are 50,000 shares that are owned by ABC Company. They're no longer in the hands of the public, so that's going to reduce our outstanding shares. So what we're going to have here is the 1,000,000 that were issued minus the 50,000 that are repurchased. And we're going to be left with 950,000 outstanding shares. Notice how there's now a difference between issued and outstanding, right? So that's the big deal here, they love to do little trick questions like this, but it's not so hard of a concept. Authorized is from the corporate charter, issued is how many we've ever issued, and finally, we reduce that by what we've repurchased. And that will give us outstanding shares. So that's about it here. Let's go ahead and move on to the next video.

Here’s what students ask on this topic:

What is the difference between authorized shares and issued shares?

Authorized shares represent the maximum number of shares a corporation is allowed to sell as specified in its charter. This number is set when the corporation is formed and can only be changed through a formal amendment to the charter. Issued shares, on the other hand, are the portion of authorized shares that have actually been sold to investors. For example, if a corporation has 20,000,000 authorized shares but has only sold 5,000,000 of them, then 5,000,000 are issued shares. The remaining 15,000,000 shares are authorized but not issued.

What are outstanding shares and how do they differ from issued shares?

Outstanding shares are the shares that are currently held by investors, excluding any shares repurchased by the corporation as treasury stock. Issued shares include all shares that have been sold to investors, but not all issued shares remain outstanding. For instance, if a corporation has issued 5,000,000 shares but has repurchased 1,000,000 of those shares as treasury stock, then only 4,000,000 shares are outstanding. The difference between issued and outstanding shares is the number of shares repurchased by the corporation.

How can a corporation increase its number of authorized shares?

A corporation can increase its number of authorized shares by amending its charter. This typically requires approval from the board of directors and a majority vote from the shareholders. The process involves filing the necessary documents with the state in which the corporation is incorporated. Increasing the number of authorized shares allows the corporation to issue more shares in the future, which can be useful for raising additional capital or for other corporate purposes.

What is treasury stock and how does it affect outstanding shares?

Treasury stock refers to shares that were once issued and outstanding but have been repurchased by the corporation. These shares are held by the corporation and are not considered when calculating outstanding shares. For example, if a corporation has issued 5,000,000 shares and repurchased 1,000,000 of them as treasury stock, then only 4,000,000 shares are outstanding. Treasury stock reduces the number of shares available in the market, which can affect the stock price and shareholder equity.

Why is it important to understand the difference between authorized, issued, and outstanding shares?

Understanding the difference between authorized, issued, and outstanding shares is crucial for grasping corporate equity and shareholder dynamics. Authorized shares set the limit on how many shares a corporation can issue, which affects its ability to raise capital. Issued shares indicate how many shares have been sold to investors, impacting the company's capital structure. Outstanding shares, which exclude treasury stock, represent the actual shares held by investors and are used to calculate key financial metrics like earnings per share (EPS). This knowledge helps investors make informed decisions and understand a company's financial health.