Additional Paid in Capital - Explained
What is Additional Paid in Capital?
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Table of ContentsWhat is Additional Paid In Capital?How is Additional Paid In Capital Used?Additional Paid in Capital ExamplePar Value in Calculating Additional Paid in CapitalAcademics Research on Additional Paid In Capital
What is Additional Paid In Capital?
Additional paid-in capital refers to the additional amount that an investor pays beyond the par-value of a stock issued. In a balance sheet, this excessive amount is considered a part of contributed surplus account under shareholders equity. One can create this additional paid-in capital with issuing either common stock or preferred stock.
How is Additional Paid In Capital Used?
Companies offer financial products including equity and debt to its investors. Similar to any other product, there are some associated costs for producing a product. A company earns profits on the sale of its product. Additional paid in capital can also be associated with profit earned on common stock. In other words, when a share is sold beyond the actual cost of the share, the book value of profit earned thereon is referred to as additional paid-in capital. It is the amount paid by investors exceeding the par value. One can find the par value, that is the actual share price, on the stock certificate. The concept of additional paid-in capital implies only to the transactions at initial public offering. Any transaction that takes place after IPO cannot add to the additional paid-in capital.
Additional Paid in Capital Example
Suppose a company has issued 1 million shares, and the par value of each share is $50. Investors pay $20 as premium per share in addition to its par value, thereby paying $70 per share. When a record of capital received from the issue is made, the amount of $50 million is referred to as share capital or paid-in capital. And the additional amount of $20 million, considered as additional paid-in capital, gets transferred to contributed surplus account. However, there can be a few companies who prefer separating additional paid-in capital and contributed surplus in financial statements.
Par Value in Calculating Additional Paid in Capital
Par value refers to the price the share of stock has, is considered a random number. Same is the case with additional paid-in capital where companies somehow sell an intangible thing, allocate it some cost, and consider the difference as profit. A company decides on its par value at the time of issuing shares when there is no market. Generally, par value is ascertained at 1 cent for every share. As per state regulations, companies cannot sell their shares at a price below par value. There are some provinces that permit organizations to issue shares without par value.