What is Additional Paid-in Capital? Explained with Example

Additional Paid-in Capital (APIC) is the number of capital investors have “paid in” to a corporation by purchasing shares in exchange for equity. Additional paid-in capital account does not show the individual contributions of each investor, just the total amount provided by all investors.

Additional Paid-in Capital

What is Additional Paid-In Capital?

Additional paid-in capital is any payment received from investors for stock that exceeds the par value of the stock. The concept applies to payments received for either common stock or preferred stock. Par value is typically set extremely low, so most of the amount paid by investors for the stock will be recorded as additional paid-in capital. Par value is commonly set at $0.01 and is printed on the stock certificate. Low par values are used because many state governments mandate that shares cannot be sold at prices below their par values.

There is no change in the additional paid-in capital account when a company’s shares are traded on a secondary market between investors since the amounts exchanged during these transactions do not involve the company that issued the shares.

The additional paid-in capital account and the retained earnings account typically contain the largest balances in the equity section of the balance sheet.

How Additional Paid-in Capital Works

Businesses raise Additional paid-in capital with new issuances of common and preferred stock. They can reduce it through treasury stock, which is when a company buys back its own shares.

Many states require that common stock is first issued at par value when the company is founded, but some states don’t require it. From there, all further issuances of stock are added to the three paid-in capital accounts.

Par-Value

Due to the fact that APIC represents money paid to the company above the par value of a security, it is essential to understand what par actually means. Simply put, “par” signifies the value a company assigns to stock at the time of its IPO, before there is even a market for the security.

Issuers traditionally set stock par values deliberately low—in some cases as little as a penny per share—in order to preemptively avoid any potential legal liability, which might occur if the stock dips below its par value.

Market Value

Market value is the actual price a financial instrument is worth at any given time. The stock market determines the real value of a stock, which shifts continuously as shares are bought and sold throughout the trading day. Thus, investors make money on the changing value of a stock over time, based on company performance and investor sentiment.

How to Create Additional Paid-in Capital on Balance Sheet?

Additional paid-in capital is created at the time of the initial public offering, that is, the first time a stock is issued in the primary market by the company. Additional paid-in capital is also impacted when the company repurchases its own stock.

At the time of the first-time issuance of the share or initial public offering (IPO), the company is free to fix any price for its stock subject to government norms, and investors can pay an amount above the par value of the stock. Any excess amount than the nominal or par value of the stock will create additional paid-in capital on the balance sheet.

Paid-in Capital vs. Earned Capital

Paid-in capital tells an analyst how much money has been invested in a business, and earned capital tells the analyst how much money has been generated by the company’s operations and investments.

Earned capital, or “retained earnings,” is the other half of shareholder’s equity. Retained earnings are the sum total of all profit the company has earned minus any dividends distributed to shareholders.

Example of Additional Paid In Capital

If a company wanted to raise $1,000,000 in order to fund a new factory, it could do so via paid-in capital. It would list 100,000 shares of new stock at $10 each in order to raise this amount.

The $1,000,000 will be listed among the company’s assets along with the additional corresponding equity. However, the total figure will be broken up into two lines:

  • The face value (or par value) of the stock
  • Anything above the face value of the stock

The company will then choose its par value, which is usually something like $0.01 for each new share of stock. Anything over the par value is then recorded as additional paid-in capital.

Example

Company X is a manufacturing company. The company decides to build a second manufacturing plant by issuing 20,000 shares of new stock at $5 per share. The par value of the stock is $0.01. The company has 552,361 common shares outstanding.

Hence, the additional paid-in capital formula is calculated as follows:

APIC = (Issue price – Par value) x Shares Outstanding = ($5 – $0.01) x 552,361 = $2,755,159.

Additional Paid-in Capital vs. Paid-in Capital

Paid-in capital, or contributed capital, is the full amount of cash or other assets that shareholders have given a company in exchange for stock. Paid-in capital includes the par value of both common and preferred stock plus any amount paid in excess.

Additional paid-in capital, as the name implies, includes only the amount paid in excess of the par value of stock issued during a company’s IPO.

Both of these items are included next to one another in the SE section of the balance sheet.

Is Paid-In Capital a Debit or Credit

Why Is Additional Paid-in Capital Useful?

APIC is a great way for companies to generate cash without having to give any collateral in return. Furthermore, purchasing shares at a company’s IPO can be incredibly profitable for some investors.

Is Paid-In Capital a Debit or Credit?

Paid-in capital appears as a credit (increase) to the paid-in capital section of the balance sheet, and as a debit, or increase, to cash. If not distinguished as its own line item, there will be a debit to cash for the total amount received and credits to common or preferred stock and additional paid-in capital.

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