The Authorised capital of the company is the maximum amount of share capital for which shares can be issued by a company. It is stated in the Memorandum of Association of the company and is further subcategorized into equity shares and preference shares .
Thus, authorized capital is the limit to which the companies can raise shares to the shareholders and not beyond it. Therefore, the companies get registered with capital, which is quite above their current needs of financing, so that the capital can be further raised when the need arises.
It is also known as ‘authorised stock’, ‘authorised shares’, or ‘authorised capital stock’.
The initial authorized capital of a company is usually Rs 1 lakh and it can be increased by the company at any time with shareholders approval and by paying an additional fee to the Registrar of Companies.
ACCOUNTING FOR AUTHORISED SHARE CAPITAL
The Authorised share capital does not need to be recorded in the company’s bookkeeping as it does not have any monetary impact on the company until it’s issued.
The authorized capital of a company is only reported on the balance sheet for information purposes & isn’t considered in the totalling of the balance sheet.
CLASSIFICATION OF AUTHORISED CAPITAL
The authorized share capital is usually divided into following three categories :-
Issued Capital –
Issued capital is a part of authorized share capital and refers to the number of shares issued by the company to the shareholders.
Subscribed Capital –
Subscribed share capital is that part of issued share capital for which a company has positively received subscription from the investors.
Paid up Capital –
Paid-up capital is the amount of money a company has received from shareholders in exchange for shares.
Thus, in simple words, the Authorized share capital represents the maximum possible funding that a company is allowed to raise through issue of shares and is determined and specified at the time of incorporation of the company.