Definition:

Authorised capital is the maximum amount of capital that a company is legally authorized to raise. It is typically stated in the company’s charter or articles of association. The authorised capital is used as a reference point for determining the company’s authorized share capital and the maximum amount of debt that it can raise.

Key Points:

• Legal limit: The authorised capital is a legal limit established by the company’s charter or articles of association.
• Reference point: It is used as a reference point for determining the company’s authorized share capital and the maximum amount of debt that it can raise.
• Company’s capacity: The authorised capital determines the company’s capacity to raise capital.
• Increase with shareholder approval: The company’s authorized capital can be increased with shareholder approval.
• Common law: In common law countries, the authorised capital is often referred to as the company’s “capital clause.

Formula:

Authorised Capital = Share Capital + Reserves and Surplus

where:

• Share Capital: The company’s authorized share capital.
• Reserves and Surplus: The company’s reserves and surplus.

Example:

A company has an authorized capital of $100,000. This means that the company is authorized to raise a maximum of $100,000 in capital. The company’s issued share capital is $50,000, so there is $50,000 remaining in authorized but unissued capital.

Additional Notes:

• The authorised capital is a flexible figure and can be adjusted over time through shareholder approval.
• The authorised capital is not necessarily the same as the company’s issued capital or paid-up capital.
• The authorised capital is an important corporate financial statement item that provides information about the company’s capacity to raise capital.