Shares Authorized, Issued, and Outstanding - Video Tutorials & Practice Problems
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Shares Authorized, Issued, and Outstanding
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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's 33 numbers that we use. When we talk about, uh, common stock first, we talk about the authorized shares. The authorized shares is the total amount of shares the corporation is allowed to sell according to its charter. So when they first created the corporation, they would have wrote something in the charter. Hey, we are allowed to sell a maximum of 20 million shares of common stock and that's the maximum and it has to be written in the, in the charter and that's gonna 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. This is the amount of shares the corporation has previously sold to investors. So when you sell shares to investors, well, that is when 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 an 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 onto 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, they can go to the open market just like you or me could buy a share of Apple stock. They could repurchase their shares as well. So they could 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 gonna do is I'm gonna do this artistic rendition to kind of visualize um The difference between these three. So I never told you before, but I I've always dreamed of being a visual artist. I've wanted to paint murals on the wall, have my paintings hanging in the louver and this is gonna 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 gonna have is what I call the concentric circles of outstanding of of common stock That the concentric circles of common stock. So let's go ahead and do this 1st. 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 gonna draw. Now this is gonna 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 gonna be what's outstanding. Obviously if we haven't repurchased any shares well then the issued and the outstanding are gonna be the same because we haven't repurchased any. So the only difference there would be when we repurchased shares and then we have less outstanding shares because there's less 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
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Shares Authorized, Issued, and Outstanding
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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.
