Is the Trust Fund Theory of Capital Stock Dead?

Abstract In 1825, famous "trust fund theory" was given which states that the capital stock of a corporation constitutes a trust fund for the payment of its debts to creditors. This theory has had important implications for accounting. The accounting treatments accorded the payment of dividends and the purchases by the corporation of its own outstanding stock are representative ones. Others are the accounting for premiums and discounts on the issuance of stock and the presentation of all types of surplus on the balance sheet. The purpose of the trust fund theory of capital stock was to cause the assets originally paid in by the stockholders to remain in the corporation as a buffer for the protection of the creditors' interests. Actually, capital stock itself cannot be a trust or a fund held in trust. Neither can the assets represented by the capital stock account constitute a trust. The corporation is not a formal trustee of the contributions made by shareholders, and the creditors are not beneficiaries. It was never intended that the assets contributed by the stockholders should remain in the corporation in their original physical character.