Three counts of one thing: authorized, issued, outstanding
When the first guide in this rung introduced the corporation, it framed ownership as something carved into transferable pieces called shares. Before any of those pieces can change hands, you need to know how many exist — and here accounting plays a quiet trick on the beginner: it keeps *three* different counts of the same shares, and they are almost never equal. Getting these three numbers straight is the foundation for everything else in this guide.
Authorized shares are the ceiling: the maximum number the corporate charter permits the company to ever create, fixed when the company is formed and changeable only by amending the charter. Issued shares are the ones the company has actually sold and put into existence so far. Outstanding shares are the issued shares still held by investors out in the world right now — issued shares minus any the company has bought back. This trio is the heart of authorized, issued, and outstanding shares, and you read it as a funnel: authorized is the biggest, issued is a subset of it, outstanding is a subset of that.
Par value: a relic that splits the cash in two
Now to the strangest number on a stock certificate. Par value is a tiny, arbitrary amount — often one cent, or a dollar — stamped on each share when the company is chartered. It is *not* the price you pay for the share, *not* its market value, and *not* what the share is worth. A share with a one-dollar par can sell for fifty. Par is a leftover from nineteenth-century law, where it once promised creditors a minimum cushion of capital that owners could not simply pay back to themselves. Today it is mostly a bookkeeping convention — but a convention with teeth, because accounting rules still force the issue price to be split around it. This is the idea of par value.
Here is the split, and it is the one mechanic you must internalize for the whole guide. When a company issues a share, the cash it receives is divided into two equity accounts. The par portion — par value times the number of shares — goes into the [[common-stock|common stock]] account. Everything received *above* par goes into a second account called [[additional-paid-in-capital|additional paid-in capital]], sometimes labelled "paid-in capital in excess of par." Both accounts are equity; together they record the full amount owners paid in. The line is not drawn by economic meaning — it is drawn by that arbitrary par figure.
The journal entry: cash in, equity split
Let us turn this into an actual entry, using the debit-and-credit machinery you mastered far down the ladder. Suppose our growing bakery incorporates and sells 10,000 shares of common stock, each with a $1 par value, to investors for $12 per share. Cash comes in: 10,000 times $12, which is $120,000. We debit Cash for the full $120,000, because cash — an asset — went up. Now the credit side must split. The par portion is 10,000 shares times $1, so $10,000 credits Common Stock. The remaining $110,000 credits Additional Paid-In Capital.
Issue 10,000 common shares, $1 par, at $12:
Dr Cash 120,000
Cr Common Stock (10,000 x $1) 10,000
Cr Additional Paid-In Capital 110,000
( debits 120,000 = credits 120,000 -> balanced )Stand back and notice what did *not* happen. No revenue was recorded. Selling your own shares is not earning a profit — it is owners putting money in, which is exactly why it lands in equity and never touches the income statement. This is the same honest line the ladder has drawn before: money from operations is income, money from owners is capital, and the two must never be confused. A company that issued shares had a great financing day, not a profitable one.
No-par stock: when the split disappears
Many modern companies, tired of the par-value relic, simply issue no-par stock — shares with no par value printed on them at all. The accounting then gets cleaner: with no par to set aside, the *entire* proceeds go straight into the common stock account, and additional paid-in capital may not appear at all. Our same bakery issuing 10,000 no-par shares at $12 would record one tidy line: debit Cash $120,000, credit Common Stock $120,000. Same cash, same total equity, fewer accounts.
There is a middle case worth naming: stated value stock. Some jurisdictions let a board assign a nominal "stated value" to no-par shares, which then behaves exactly like par for the split — the stated amount goes to common stock, the excess to paid-in capital. So you may meet three flavors: par, no-par with a stated value, and true no-par. They differ only in *how the credit side is carved up*. In every case the debit to cash is the full price, and total equity rises by exactly what the owners paid. Hold onto that invariant and no variant can confuse you.
Preferred stock: the hybrid between owner and lender
So far every share has been common stock — the ordinary, voting, last-in-line ownership of a company. But a corporation can issue a second class with different rights: [[preferred-stock|preferred stock]]. Its name says it plainly: in two specific places, preferred shareholders go *first*. The trade-off is that they usually give up the vote and give up the unlimited upside. Preferred stock is the classic hybrid — it has the legal form of equity but behaves, in many ways, like a loan that never has to be repaid.
The first preference is dividends. Preferred shares carry a fixed dividend rate — say 6% of a $100 par, so $6 a share each year — and that dividend must be paid in full before common shareholders may receive a cent. Stronger still is the cumulative feature: if the company skips a preferred dividend in a lean year, the unpaid amount does not vanish — it piles up as "dividends in arrears" and must all be cleared, past skips included, before common gets anything. The second preference is liquidation: if the company is wound up and its assets sold, preferred holders are repaid their stated amount ahead of common holders. In both queues — the yearly dividend line and the final breakup line — preferred stands in front.
The bookkeeping, reassuringly, is the very same machinery. Preferred stock has its own par and its own pair of accounts: a Preferred Stock account for the par and an additional-paid-in-capital account for the excess. Issue 1,000 shares of $100-par preferred at $105, and you debit Cash $105,000, credit Preferred Stock $100,000, and credit Paid-In Capital in Excess of Par—Preferred $5,000. Identical split, separate accounts so a reader can see the two ownership classes apart. One honest caution: do not mistake preferred for a safe bond. Its dividend can be skipped without triggering default, it has no maturity date forcing repayment, and it sits *behind* every real creditor in liquidation. It is preferred only relative to common — not relative to the people the company actually owes.
Putting it together: reading the equity section
Stack everything from this guide and you can now read the top of a real balance sheet's equity section. It lists each class — preferred first, then common — and for each one shows par value, shares authorized, shares issued, and shares outstanding, followed by the dollar amount in the stock account and the matching additional paid-in capital. Below those sits retained earnings, the kept profits from the previous guides. Paid-in capital plus retained earnings is the owners' whole stake.
- Find the three share counts and use *outstanding* — never authorized — to judge ownership percentages and per-share figures.
- Read common stock plus additional paid-in capital together as one number: total cash the owners contributed. The split at par is cosmetic.
- Spot any preferred line and check its rate and whether it is cumulative — that tells you who must be paid, and how much in arrears, before common sees a dividend.
One last thread to carry forward. Everything here recorded money flowing *in* as owners bought shares. The next guides reverse the current: dividends carry profit back *out* to those owners, and stock splits and stock dividends reshuffle the share count without any cash moving at all. The accounts you just met — common stock, preferred stock, additional paid-in capital, and their share counts — are the stage on which all of that will play out.