Additional Paid in Capital – Definition

Cite this article as:"Additional Paid in Capital – Definition," in The Business Professor, updated July 29, 2019, last accessed May 28, 2020, https://thebusinessprofessor.com/lesson/additional-paid-in-capital-definition/.

Back to: ACCOUNTING, TAX, & REPORTING

Additional Paid In Capital Definition

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.

A Little More on What is Additional Paid In Capital

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.

Reference for “Additional Paid In Capital”

Academics research on “Additional Paid In Capital”

Using accounting equation analysis to teach the statement of cash flows in the first financial accounting course, O’Bryan, D., Berry, K. T., Troutman, C., & Quirin, J. J. (2000). Using accounting equation analysis to teach the statement of cash flows in the first financial accounting course. Journal of Accounting Education, 18(2), 147-155. Understanding the statement of cash flows requires that students have some knowledge of accrual-basis accounting. This means that coverage of the statement of cash flows is deferred until late in the introductory financial accounting course and related textbooks, a time when student motivation and retention may be waning. The timing of statement of cash flow coverage is unfortunate for two reasons. First, the statement of cash flows is an important topic that all business students need to understand. Second, most students understand cash flows at the start of their financial accounting class, so there is no reason to defer coverage of this topic. This paper describes a user-oriented, pedagogical approach to integrating the statement of cash flows throughout the first financial accounting course. The essence of this approach is the use of an expanded accounting equation with temporary cash accounts corresponding to the major categories on the statement of cash flows. Directly capturing cash flow information simplifies the preparation of the statement of cash flows.

Changes in accounting education: Improving principles content for better understanding, Boyd, D. T., Boyd, S. C., & Boyd, W. L. (2000). Changes in accounting education: Improving principles content for better understanding. Journal of Education for Business, 76(1), 36-42. Since the FASB replaced the APB in 1972, over 130 new pronouncements have been affecting the way we practice and teach accounting. Women are now on the verge of dominating the accounting workplace. Litigation has become ever present, and the 150-hour requirement has been adopted in most states. A call has been issued for a better educated accounting graduate, and information in accounting areas such as history, ethics, international applications, and computers is exploding. Meanwhile, classroom hours in the first accounting courses have shrunk by 40% at most universities. This article offers suggestions for more effective teaching of the “first course in accounting” through visual aids and use of the concepts approach.

Research on Recognizing and Calculating Human Capital & it’s Corresponding Human Resource [J], Suntang, D. (2008). Research on Recognizing and Calculating Human Capital & it’s Corresponding Human Resource [J]. Accounting Research, 2. Human Resource Accounting as a modern concept in the field of accounting. It is a process of identifying and measuring data about human resources. Measurement of the investment in human resources will help to the organization to evaluate the expenses made in human resource over a period of time. For the betterment of the organizations, it is necessary to evaluate the worth of human resources in a systematic manner and record theinformation related to them in the financial statement of the organization to communicate their worth time to time to theusers of the financial statement. From the information of human resource accounting management can take the proper decision about their future decision endeavor. In this paper attempt has been made to include different conceptual   aspect of human resources accounting which is focus on overall progress and development in the field of Human resource accounting.

Minority interest in the consolidated retained earnings statement, Nurnberg, H. (2001). Minority interest in the consolidated retained earnings statement. Accounting Horizons, 15(2), 119-146. Consolidated financial statements purport to report income, financial position, and cash flows of a parent company and its subsidiaries as if the group were a single company with one or more branches or divisions. Under the parent company theory, the consolidated entity perspective assumed in the consolidated income statement, the consolidated balance sheet, and the consolidated retained earnings statement differs from the consolidated entity perspective assumed in the consolidated cash flow statement. Even under extant expositions of the entity theory, the consolidated entity perspective assumed in the consolidated income statement, the consolidated balance sheet, and the consolidated cash flow statement differs from the consolidated entity perspective assumed in the consolidated retained earnings statement. This paper develops a consistent consolidated entity perspective for all four consolidated financial statements. It demonstrates that under the entity theory, consolidated retained earnings includes the separate equities of both the parent company stockholders and the minority interest. As such, both elements of retained earnings should be reported in the consolidated retained earnings statement to make it comparable to the consolidated retained earnings statement of companies without subsidiaries or with only wholly owned subsidiaries. The effect on certain financial ratios of public companies may be substantial. The paper also demonstrates that for purchased subsidiaries, minority interest in consolidated retained earnings includes unamortized write-ups of identifiable net assets and goodwill arising from purchase-type business combinations.

Coordination of earnings, regulatory capital and taxes in private and public companies, Mikhail, M. B. (1999). Coordination of earnings, regulatory capital and taxes in private and public companies. Regulatory Capital and Taxes in Private and Public Companies (May 1999). This study investigates whether the form of ownership in the life insurance industry (i.e., public, private or mutual) affects the pursuit of capital, earnings, and tax management goals between 1975 and 1991. Results indicate that differences resulting from ownership structure are most pronounced in the area of tax planning. Private stock companies use both policy reserves and reinsurance to manage taxes while public companies, on average, do not appear to manage taxes. I investigate whether the tax planning differences observed appear to be induced by compensation schemes used to control agency costs in public firms, or concerns with stock market interpretations, by studying the tax planning behavior of mutual firms. These firms have diffuse ownership structures, similar to those of public companies, and thus face similar agency problems. But since mutual firms are owned by their policyholders, they are not subject to the stock market concerns that affect public companies. If both private stock and mutual firms manage taxes more aggressively than public companies, the inference is that stock market concerns create the behavioral differences. However, if only private stock companies are aggressive tax managers, differences are more likely to stem from agency costs. My results indicate that mutual firms, like public companies, do not, on average, manage taxes. This outcome is consistent with incentive compensation contracts, designed to control agency costs, at least partly inducing differences in tax management behavior between private and public stock companies.

Was this article helpful?