Capital Stock vs Treasury Stock: Tabular Comparison and Balance Sheet Placement
Understanding the difference between capital stock and treasury stock is essential for students of accounting and commerce. These concepts are important for school and competitive exams, as well as for building knowledge about company accounts and financial reporting. At Vedantu, we break down such topics for clarity and real-world application.
Here’s a quick comparison to help you visually distinguish capital stock and treasury stock:
| Aspect | Capital Stock | Treasury Stock |
|---|---|---|
| Meaning | Total authorized shares issued by a company representing ownership | Company’s own shares that were issued and then bought back or never issued |
| Purpose | To raise long-term funds and allocate ownership rights | To reduce outstanding shares, fund employee programs, or support share prices |
| Voting Rights | Shares have voting rights | Shares do not carry voting rights |
| Dividends | Eligible for dividends | Not eligible for dividends |
| Balance Sheet Position | Shown under Shareholder's Equity as paid-up capital | Deducted from Shareholder's Equity as a contra equity account |
| Impact on Equity | Increases equity | Reduces total equity |
Difference Between Capital Stock and Treasury Stock
Capital stock refers to all shares a company has issued and represents company ownership. Treasury stock is the portion of shares repurchased by the company, held in its own treasury, and not available to the public. Capital stock provides voting and dividend rights, while treasury stock does not.
- Capital stock boosts shareholder funds; treasury stock reduces them.
- Only outstanding shares (capital stock minus treasury stock) determine voting and dividend rights.
- Exam tip: Treasury stock is always subtracted from equity in the balance sheet.
Examples of Capital Stock and Treasury Stock
Suppose ABC Limited issues 1,00,000 shares, each worth ₹10. This is its total capital stock. If the company later buys back 10,000 shares from investors, these become treasury stock. As a result, only 90,000 shares will be considered outstanding and eligible for dividends and voting.
Real-world example: Companies often buy back their shares to increase Earnings Per Share (EPS) or maintain share price stability, like during economic downturns. You can read more about related concepts in our topic on Issue, Forfeiture and Reissue of Shares.
Treatment in Balance Sheet
On the balance sheet, capital stock appears as part of "Share Capital" under the Equity section. Treasury stock is shown as a deduction (negative amount) within "Shareholder's Equity." Here’s a simple format:
| Particulars | Amount |
|---|---|
| Share Capital (Capital Stock) | ₹10,00,000 |
| Less: Treasury Stock | (₹1,00,000) |
| Net Equity (Outstanding Shares) | ₹9,00,000 |
You can practice this topic with our detailed examples in DK Goel Solutions Class 12 Accountancy and access more concepts around balance sheet reporting.
Common Confusions: Related Terms
- Common Stock: A type of capital stock that carries voting rights and dividends.
- Preferred Stock: Another type of capital stock, usually without voting rights but with fixed dividends.
- Treasury Stock: Not a new class of stock, but issued shares which are reacquired and held by the company; no rights or dividends attached.
- Paid-in Capital: Total funds received by the company from shareholders, excluding treasury stock.
- Retired Stock: Shares permanently cancelled and cannot be reissued, unlike treasury stock which can be reissued.
Exam Tips and Quick Revision Points
- Capital stock represents all shares a company issues; treasury stock is what the company buys back.
- Treasury stock reduces shareholders' equity on the balance sheet.
- Capital stock holders have voting and dividend rights, treasury stock holders do not.
- For exam MCQs, remember: Treasury stock is a contra equity account.
- Know the difference while preparing financial statements and calculating ratios like EPS.
For related reading and further study, check topics like Equity Shares and Preference Shares and Financial Statements of a Company to strengthen your fundamentals. These are especially helpful during last-minute revisions for Commerce and accounting exams.
In summary, the difference between capital stock and treasury stock is crucial for anyone studying accounts. Capital stock reflects the total issued shares and investor ownership in the company. Treasury stock is the portion repurchased or held back by the company, reducing both outstanding shares and equity. Knowing the distinction helps students answer exam questions accurately and understand real-world company accounts. At Vedantu, we make Commerce concepts simple and exam-ready!
FAQs on Difference Between Capital Stock and Treasury Stock
1. What is the main difference between capital stock and treasury stock?
Capital stock represents the total number of shares a company is authorized to issue, signifying ownership and voting rights. In contrast, treasury stock comprises shares the company has repurchased and holds, effectively removing them from the outstanding shares. These shares don't carry voting rights or dividend entitlements.
2. What is the difference between common stock and treasury stock?
Common stock represents ownership in a company, granting voting rights and potential dividend payouts. Treasury stock, however, is a company's own stock that it has repurchased. It doesn't have voting rights and doesn't receive dividends; it's essentially a contra-equity account on the balance sheet.
3. What is another name for treasury stock?
Treasury stock is also sometimes referred to as reacquired shares, treasury shares, or company's own shares. These terms all refer to the same concept: shares that have been bought back by the issuing company.
4. What is the difference between treasury stock and retired stock?
Treasury stock represents shares repurchased by a company that can be reissued later. Retired stock, on the other hand, is stock that has been permanently cancelled and will never be reissued.
5. What is the difference between capital stock and stock?
Capital stock refers to the total authorized shares a company can issue, representing the company's ownership structure. The term 'stock' is a broader term that encompasses all types of shares, including capital stock, common stock, preferred stock, and treasury stock. Capital stock is a subset of stock.
6. Where do capital stock and treasury stock appear on a company's balance sheet?
Capital stock is reported as part of shareholders' equity. Treasury stock is presented as a deduction from total equity—a contra-equity account—reflecting the reduction in outstanding shares.
7. Does treasury stock have voting rights or earn dividends?
No, treasury stock does not carry voting rights nor does it entitle its holder (the company itself) to dividends. These rights are suspended while the shares are held as treasury stock.
8. Are capital stock and common stock the same?
No, while common stock is a *type* of capital stock, capital stock is a broader term encompassing all classes of shares a company is authorized to issue, including common stock and preferred stock. Common stock is a component of the overall capital stock.
9. How does a company’s buyback of shares as treasury stock affect earnings per share (EPS)?
Repurchasing shares as treasury stock reduces the number of outstanding shares. If the company's net income remains constant, this reduction in outstanding shares can lead to a higher earnings per share (EPS), making the stock appear more profitable.
10. Can treasury stock be reissued to raise capital?
Yes, a company can reissue treasury stock. This process increases the number of outstanding shares and can be used to raise additional capital through the sale of these shares in the market.
11. What is the difference between capital stock and treasury stock in a balance sheet?
On a balance sheet, capital stock is shown as a positive addition to shareholders' equity, while treasury stock is a negative item that reduces shareholders' equity. This reflects the fact that treasury stock represents a reduction in outstanding shares.
12. What is treasury stock?
Treasury stock is a company's own stock that it has repurchased from the market. It's no longer considered outstanding and does not carry voting rights or dividend entitlements.
