📊 Authorized Capital
Understanding Nominal Capital & Registered Capital in Company Accounts
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Meaning of Authorised Capital
💡 What is Authorized Capital?
Authorized Capital is also known as Nominal Capital or Registered Capital.
🎯 Simple Definition
Authorized Capital is the maximum amount that a company can raise by issuing shares.
This amount is mentioned in the company's Memorandum of Association.
Authorized Capital is the maximum share capital amount that the company gets permission from the government to raise.
📋 Where is Authorized Capital Mentioned?
The amount of Authorized Capital is written in the Memorandum of Association of the company.
📄 Important Document
The Memorandum of Association is a legal document that contains the company's capital clause, which specifies the authorized capital amount.
📊 Types of Shares in Authorized Capital
As we know, shares are of two types:
- Equity Shares - Ordinary shares with voting rights
- Preference Shares - Shares with preferential rights for dividends
✍️ How to Mention in Memorandum
The Memorandum of Association must mention the amount of both types of share capital separately:
- Authorized Equity Share Capital: ₹________
- Authorized Preference Share Capital: ₹________
🔄 Relationship: Authorized Capital vs Issued Capital
Before we learn about Issued Capital in detail, let's understand one important relationship:
⚖️ Important Rules
- ✅ Authorized Capital can be MORE than Issued Capital
- ✅ Authorized Capital can be EQUAL to Issued Capital
- ❌ Authorized Capital can NEVER be LESS than Issued Capital
Visual Comparison
✅
Authorized > Issued
Allowed
Auth: ₹10 Cr
Issued: ₹6 Cr
✅
Authorized = Issued
Allowed
Auth: ₹10 Cr
Issued: ₹10 Cr
❌
Authorized < Issued
Not Allowed
Auth: ₹10 Cr
Issued: ₹12 Cr
📝 Understanding with an Example
🏢 Example: ABC Company
Given: ABC Company has an Authorized Capital of 10,000 shares.
What this means:
- The company can issue a maximum of 10,000 shares
- The company cannot issue more than 10,000 shares without government approval
Important Point:
It is not necessary to issue all shares at once. Based on business funding needs, shares can be issued at different times.
Scenario:
- Year 1: Company issues 4,000 shares (₹4 lakh)
- Year 2: Company issues 3,000 shares (₹3 lakh)
- Year 3: Company can still issue remaining 3,000 shares (₹3 lakh)
Total shares issued over time cannot exceed 10,000 shares.
📚 What's Included in Memorandum of Association?
There are different types of capital in a company. However:
✅ Included in Memorandum
Only Authorized Capital is mentioned in the Memorandum of Association.
❌ Not Included in Memorandum
The following types of capital are NOT mentioned in the Memorandum of Association:
- Issued Capital
- Subscribed Capital
- Paid Up Capital
- Called Up Capital
📖 Journal Entry for Authorized Capital
✅ Important Accounting Point
No journal entry is passed for Authorized Capital in the books of accounts.
Why?
Because the company has not received any money yet. The company has only received permission from the government to raise capital. No actual transaction has taken place.
Journal entries will be passed only when:
- Shares are actually issued (Issued Capital)
- Applications are received (Application Money)
- Money is collected from shareholders
🎯 How is Authorized Capital Decided?
The amount of Authorized Capital is decided by the company's promoters based on:
- Business Needs - How much capital the business will require
- Future Expansion Plans - Anticipated growth and funding requirements
- Industry Standards - Similar companies' capital structure
- Regulatory Requirements - Minimum capital requirements for the industry
📋 Process
- Promoters decide the authorized capital amount
- Apply to the government (Registrar of Companies) for permission
- Once approved, this amount is mentioned in the Memorandum of Association
⭐ Key Points Summary
📌 Definition
Maximum amount a company can raise by issuing shares
📌 Other Names
Nominal Capital, Registered Capital
📌 Document
Mentioned in Memorandum of Association
📌 Share Types
Equity and Preference shares mentioned separately
📌 Relationship
Always ≥ Issued Capital
📌 Journal Entry
No entry passed (no money received)
📌 Decision
Decided by promoters based on business needs
📌 Permission
Requires government approval
❓ Frequently Asked Questions
What is Authorized Capital?
▼
Authorized Capital is the maximum amount that a company can raise by issuing shares. It is also known as Nominal Capital or Registered Capital and is mentioned in the company's Memorandum of Association.
Where is Authorized Capital mentioned?
▼
Authorized Capital is mentioned in the Memorandum of Association of the company. It is a legal document that specifies the maximum capital the company is authorized to raise.
Can Authorized Capital be less than Issued Capital?
▼
No, Authorized Capital can never be less than Issued Capital. It can be more than or equal to Issued Capital, but never less. This is a fundamental rule in company accounting.
Is any journal entry passed for Authorized Capital?
▼
No, no journal entry is passed for Authorized Capital because the company has not received any money yet. The company has only received permission from the government to raise capital.
What types of shares are included in Authorized Capital?
▼
Authorized Capital includes both Equity Shares and Preference Shares. The Memorandum of Association must mention the amount of both types separately.
Does a company have to issue all authorized shares at once?
▼
No, it is not necessary to issue all authorized shares at once. Based on business funding needs, shares can be issued at different times. The only requirement is that total issued shares cannot exceed authorized shares.
Who decides the Authorized Capital amount?
▼
The Authorized Capital amount is decided by the company's promoters based on business needs, future expansion plans, and industry standards. After deciding, they apply to the government for permission.