Paid in Capital – Definition

Cite this article as:"Paid in Capital – Definition," in The Business Professor, updated March 27, 2019, last accessed October 22, 2020, https://thebusinessprofessor.com/lesson/paid-in-capital-definition/.

Back to: ACCOUNTING, TAX, & REPORTING

The term paid-in capital is used to describe the amount of capital that investors have “paid in” during the issuance of either common or preferred stock. This process also includes the ‘par value’ of different shares. Paid-in capital is actually a fund that an organization raises by selling its capital. This has nothing to do with continuing (ongoing) operations.

Paid-in capital is listed on an organization’s balance-sheet as stockholders’ equity. That is indicated along with a balance-sheet entry in the context of additional paid-in capital.

A Little More on What is Paid-In Capital

Paid-in capital is also known as contributed capital. It is compared with another type of capital known as additional paid-in capital. Any difference concerning the value between these two types of capital is considered equal to the premium that an investor pays over and above the shares par value. The par value of preferred shares is slightly higher than marginal, however, at present; the majority of common shares have par-values that are only a few pennies. Due to this reason “additional paid-in capital” is taken as representative for an overall ‘paid-in capital’ figure. It sometimes appears on balance sheet itself.

Paid-in capital is those payments that investors give in exchange for entity stock. This is known as an important component in relation to business equity. Paid-in capital is a contribution from investors side in favor of an organization by buying its stock. The primary market does not buy stock from other open market stockholders. It is known as the secondary market. It includes sare value along with additional paid-in capital. The contributed money by a shareholder does not appear in the paid-in account but exhibits an aggregate amount that investors make. Paid-in capital value is not like additional paid-in capital. Paid-in capital involves par value as well as sold stock. In contrast, additional paid-in capital indicates the selling price of the stock over the par value. The formula of paid-in capital works in the following manner;

Paid-in capital = Par value + Additional paid-in capital

An alternate understanding appears as paid-in capital equals the additional paid-in capital to exclude the par value from the definition. Hence, you must have a clear idea of the definition while you are in discussion with someone else who might have a different understanding of this term.

With regard to common stock, the paid-in capital is based on par value of the stock including additional paid-in capital. The amount of capital is issued to investors. It is to note that this given amount is in excess of the premium that investors pay in return of the shares. Additional paid-in capital plays a significant role in the organization’s equity capital before the beginning of the retained earning accumulation; it is also considered a vital capital layer of defense (protection) against possible business losses that appear in the form of deficit concerned with retained earnings. In situations when prices of shares go down (Short of the retirement of any shares), overall account balance related to paid-in capital, particularly entire par value along with amount concerned with additional paid-in capital, needs to be unchanged because the organization carries on (a continuing process) its business.

This process allows organizations to get back shares from shareholders at different times by returning some capital to them. These bought back shares at their original purchase cost are listed within the equity section related to shareholders as treasury stock. It is to note that a contra-equity account helps to decrease the total balance concerning shareholder’s equity. In the case of treasury stock profitable sale than its original cost, the gained profit is called ‘paid-in capital from treasury stock’ and it is considered as part of shareholder’s equity. It is to note if the selling price of a stock is less than its purchased price then shareholders’ equity is restored at pre-share-buyback level.

An organization can retire (withdraw) some of the treasury shares and this is another method to remove the treasury stock rather the company reissues it, withdrawal of treasury shares decreases the balance related to paid-in capital, overall par value or extra paid-in capital as it is applicable to many withdrawn treasury shares. Whether the first buying cost of the treasury shares is up or down as compared to the paid-in capital amount related to the no. of removed shares, either the company credits the paid-in capital from the withdrawal of treasury shares to the capital section of the stockholders or debits the retained income for extra loss of value in the capital of the stockholders.

References for Paid in Capital

Academic Research on Paid in Capital

The Requirement of Minimum PaidIn Capital, Travis, A. (1947). Tex. L. & Leg., 1, 259. This paper examines the requirements that are essential for minimum Paid-in Cash for the stability of business processes and to resolve any business equity issues.

Return the PaidIn Capital of the Federal Reserve Banks, Magee, J. D. (1921). Journal of Political Economy, 29(6), 478-486. This paper is a standardized and complete analysis concerning the procedures related to Paid-in capital returns to Federal Reserve Banks of USA.

Japan: Constructive dividends from reduction of paidin capital, International Tax Review, 12(8), 66. The study explores the Japanese market and the role of reduced paid-in capital that results in constructive dividends.

with a paidin capital of $400,000,  In this research, the writer highlights the results of a venture of Norfolk bank that started its business in 1885, with US$400,00 paid-in capital and with steady progress the business became successful.

Subsidiary equity financing–Income or additiona paidin capital to parent and consolidated entity?, Mellman, M. (1973). The CPA Journal (pre-1986), 43(000006), 517. The author elaborates on subsidiary equity financing and the effects of ‘additiona’ or income paid-in capital to parent and consolidated entity.

Paidin capital” and” innovative capital instruments” in the regulatory system of Italian banks: The principle of the prevalence of substance over form, Dagnino, F. (2009). Banca Impresa Società, 28(3), 421-442. The research has been carried out to evaluate the regulatory system of Italian banks in connection with Paid-in capital as well as focuses on the use of innovative capital instruments in the mentioned context. The writer examines the role of paid-in capital and “innovative capital instruments” as both of these contribute to regulatory Tier 1 in the context of Italian banking laws.

paidin capital (contributed capital). Money which a company receives as a result of is-suing SHARES, consisting of the total FACE vALUE of the shares and the total …, Lamming, R. (1988).  The paper is about paid-in capital (contributed capital). This is the money that an organization gets as a result of issuing shares. It consists of the total face value of the stock and for any premium that is paid for them.

The structure and governance of venture-capital organizations, Sahlman, W. A. (1990). Journal of financial economics, 27(2), 473-521. The writer discusses the role of the venture-capital organizations as these organizations collect money either from individuals or other business organization to make an investment. The scope or potential of such a venture is very high. However, the risk level is high as well. This research explores the level of relationship between investors and organizations that perform the venture-capital activity.

Private equity performance: Returns, persistence, and capital flows, Kaplan, S. N., & Schoar, A. (2005). The Journal of Finance, 60(4), 1791-1823. This research has been carried out to inspect the organizational performance and capital inflows in connection with private equity partnership. The study highlights the overall returns, persistence and finds out that better-performing partnerships increase follow-on funds. The role of established funds is not as sensitive as it is in the case of new entrants. These results differ from mutual funds’ results.

Capital of a Corporation, Wickersham, G. W. (1908). Harv. L. Rev., 22, 319. In this research, the writer examines the importance of organizational capital with different financial perspectives that are behind the loss or profit of an organization. The research also highlights how capital is used to create profit in a business.

Shareholder Advances: Capital or Loans, Cohen, J. S. (1978). Am. Bankr. LJ, 52, 259. The research shows the role of shareholder advance by examining if such advance should be considered as capital or loan and how this will affect the overall return of the business.

Was this article helpful?