The term capital stock may refer to company stock share ownership, or to production assets of an economy.
What is Capital Stock?
The term Capital appears in quite a few different terms, with different meanings in business finance, investing, budgeting—and the field of Economics. However, all of these meanings have in common a reference to substantial resources for producing goods and services.
Economists, for instance, often use the term Capital Stock, as do Accountants. In both cases, Capital Stock refers to costly resources that earn income. Economists, however, use the term to explain the source of economic output for nations. Accountants use the term Capital Stock to explain how companies in private industry generate earnings.
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What Do Economists Mean by Capital Stock ?
In economics, the term capital stock is approximately interchangeable with the terms capital goods, real capital, or capital assets. By any of these names, capital stock items are already-produced, durable goods or any non-financial asset that works for the production of goods or services.
"Capital" entered English usage in the mid-sixteenth century, from origins in Latin Languages:
The first known use of the word capital is in early Middle English, in which it was used as an adjective meaning "of or relating to the head." It derives from the Latin adjective capitalis, of the same meaning, coming from the Latin name for "head," caput. The word originally indicated something affecting the head, as in "a capital bruise" or "a capital wound."Injuries to the head can be serious and even fatal; by extension, capital came to describe people or things threatening the loss of life ...
—Merriam-Webster1
Adam Smith's Wealth of Nations2 (1776) receives credit for imparting an economic meaning to "capital." By Smith's definition, capital is stock, while profit refers to realizing the revenue from improvements made to that stock. Smith also viewed capital improvement the preferred objective for the economic and system. Note, however, that Smith called his ideal economic system "natural liberty," although others later named it "Capitalism."
For more on the meaning of capital stock in economics, see the articles
What is Capital Stock in Accounting?
When referring to company ownership, the term capital stock is just another name for corporate share ownership. When used in this sense, common stock includes all classes of common and preferred shares.
- Accountants total the firm's company's capital stock as the sum of the firm's common and preferred shares, values equaling their selling prices at their initial public offering.
- The Total capital stock value appears on the firm's Balance sheet under Owners Equity as Paid in Capital., as Exhibit 1 (below) shows.
For more on the meaning of capital stock in accounting, see the articles:
Example Balance Sheet With Capital Stock (Contributed Capital)
The Balance Sheet summarizes the value of the firm's Assets, Liabilities, and Equities at one point in time. Companies normally publish the Balance Sheet and other financial statements just after the close of a financial quarter or year.
In Exhibit 1, below, Grand Corporation reports capital stock value (Contributed Capital ) on December 31, 20YY, as $9,439,000.
The Contributed Capital entry appears in the third of the Balance Sheet's three main sections, Owners equity. Note also that regardless of whether the company is in excellent financial health or poor health, principles of double-entry bookkeeping and accrual accounting ensure that the Balance sheet always balances. "Balance" means that the following equation always holds:
Total Assets = Total Liabilities + Total Owners Equities
The Owners Equities Section appears near the bottom of Exhibit 1. There, Capital Stock (Contributed Capital) includes three components:
- Preferred Stock: $3,798,000
- Common Stock: $4,184,000
- Contributed capital in Excess of Par: $1,457,000
These values together make up Grande Corporation's total capital stock, $9,439,000.
| Grande Corporation Figures in $1,000's Balance Sheet at 31 December 20YY |
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| ASSETS Current Assets Cash Short-term investments Accounts Receivable Less allowance doubtful accts Net accounts receivable Notes receivable short-term Inventories Raw materials Work in progress Finished goods/merchandise Operating & office supplies Total Inventories Prepaid exp, insurance, def taxes Total Current Assets |
1,969 137 611 1,692 3,664 19 |
1,369 137 1,832 20 5,986 265 |
9,609 |
| Long-Term Investments and Funds Common stock held Preferred stock held Bonds Held / Sinking funds Other Long-Term Investments Total Long-Term Investments |
493 184 364 419 |
1,460 |
|
| Property, Plant & Equipment Factory Manufacturing Equipment Less accumulated depreciation Net factory mfr equipment Store Equip / Selling Assets Less accumulated depreciation Net store/selling equipment Computer systems Less accumulated depreciation Net computer systems Total Property, Plant & Equip |
5,983 2,782 5,456 1,292 4,721 2,370 |
3,201 4,164 2,351 |
9,716 |
| Intangible Assets Copyrights Trademarks and Patents Goodwill Total Intangible Assets |
1,014 108 100 |
1,222 |
|
| Other Assets Total Assets |
68 22,075 |
||
| LIABILITIES Current Liabilities Accounts payable Notes payable, short-term Current portion of long-term debt Accrued expenses, Interest payable Unearned revenues Taxes payable Other withholding Total Current Liabilities |
1,642 912 349 146 274 141 |
3,464 |
|
| Long-Term Liabilities Bank notes payable Bonds payable, other LT liabilities Total Long-Term Liabilities Total Liabilities |
912 4,562 |
5,474 8938 |
|
| OWNERS EQUITY Contributed Capital Preferred stock Common stock Contributed capital excess of par Total Contributed Capital Retained Earnings Total Owners Equity |
3,798 4,184 1,457 |
9,439 3,698 |
13,137 |
|
Total Liabilities and Equities |
22,075 | ||
- Merriam-Webster, "9 Financial Words With Surprising Origins."
https://www.merriam-webster.com/words-at-play/financial-word-origins
Retrieved 2019-03-14.
- Smith, Adam (1776). An Inquiry into the Nature and Causes of the Wealth of Nations. London: W. Strahan.