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Authorised Capital: How it is different from Paid-up capital?
Consider a glass which is full of water. The volume of water which occupies full glass is symbolic of authorised capital. Paid-up capital is only a portion of authorised capital
‘Authorised Share Capital’ and ‘Paid Up Share Capital’ are two terms that we as investors must know about. Why? Because changes in the numbers of these metrics can effect our investment returns (read here).
Company needs capital to establish its assets and run its operations. From where the company will source its capital? It can be done in three ways?
First, the company can issue share in the market. This type of accumulated fund is called share capital. It is here that the terms authorised capital and paid-up capital find its relevance. We will read more about it in this article.
Second form of capital generation can be by retaining the profits of the company. In our balance sheet it is represented as “Reserves” or retained earnings. Read: How company use retained earnings.
Third form of capital generation is debt. Here the company approaches banks or NBFC’s etc and seek loans. Read: about debt free companies.
Before we go and see authorised and paid-up capital from point of investors, let’s get an introduction of authorised capital and try to visualise how it is related to its other entities.