Skip to main content
Pearson+ LogoPearson+ Logo
Start typing, then use the up and down arrows to select an option from the list.

Shares Authorized, Issued, and Outstanding

Brian Krogol
Was this helpful?
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 million shares. Okay, So at this point when they signed the charter, they get everything set up for the corporation. They're not gonna make any specific journal entry. There's no journal entry to make. When you authorize shares, Maybe you just make a memo, right? Maybe just a memo of, hey, there's 10 million shares outstanding or not. Sorry, 10 million shares authorized. And that's what we're gonna have here. We're gonna at this point when we sign the corporate charter, we've got 10 million shares authorized. There's no shares issued and no shares outstanding. Right? All we did was sign the Corporate Charter and that's all that's happened. Nobody's holding any shares of stock next. This could probably happen quite soon after this signing of the corporate charter, The founders paid $1 million for one million shares of common stock in abc company. At this point now there are shares issued, right? We issued some shares to the founders and we received some some cash from the founders. So there is definitely a transaction that happened here and we need to make a journal entry. So what would we do? We would debit cash, right, because we received cash. So we would debit cash for a million because cash is an asset and we received cash, we debited for the million. And what's the credit here? The credit is going to be too common stock, right? This equity account common stock because this is this million dollars is equity of the company owned by the founder's here. So the common stock is gonna be a credit that increases our equity. Cool. So, very simple journal entry. I'm sure we've seen ones like this before. So notice what's happened now to our shares. There's still 10 million authorized shares in the corporate charter. That hasn't changed. The 10 million is still gonna be the authorized shares. But now it says we issued one million shares. So there's gonna be one million shares that are issued. And of those million shares. How much are still owned by the public? one million. Right, one million shares are owned by the public. And you might say, well, the public, these are owned by the founders of the corporation. Let me get out of the way here. They're owned by the founders of the corporation. Well, remember the corporate, 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. Okay, So that's why are issued and outstanding shares are both one million. All right, So let's get down to this last one. Finally, at a later date, we're gonna 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 gonna make an entry like this. We're gonna get into more details about Treasury stock In another video. But for now you can imagine we make an entry like this. So 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 much 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, we'll notice this account. Treasury stock has a debit balance. So it's actually reducing our equity accounts. It's not an asset. Right? Don't worry about it. Now, we're gonna get into more details about Treasury stock. What I want you to notice now is what's the, what's happening with authorized issued and outstanding shares. So let me get back out of the way and let's finish this up. So how many shares are authorized at this point? It's still 10 million? Right. The the authorized shares are not gonna change, it's gonna be the 10 million 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. Okay. And that would usually only be if you've issued all of your authorized shares and you need more shares. Um but that that's kind of a rare case. So those authorized shares are not going to change, there's still 10 million from the corporate charter. How many are issued now? Well there's still one million issued right once we issue them issue them to the public. Well they are going to be counted in our issued shares And then finally we were purchased 50,000. So there's 50,000 shares that are owned by ACC company. They're no longer in the hands of the public. So that's gonna reduce our outstanding shares. So what we're gonna have here is the million that were issued minus the 50,000 that are repurchased. And we're gonna be left with 950,000 of 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 reduced that by what we've repurchased. Okay. And that will give us outstanding shares. So that's about it here. Let's go ahead and move on to the next video.