Additional paid-in capital definition
/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 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.
Presentation of Additional Paid-In Capital
The additional paid-in capital account and the retained earnings account typically contain the largest balances in the equity section of the balance sheet. The additional paid-in capital line item is noted in the following balance sheet exhibit.
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How to Increase Additional Paid-In Capital
The recorded amount of additional paid-in capital can only increase when an issuer sells more stock to investors, where the price at which the shares are sold exceeds the par value of the shares. There is no impact on additional paid-in capital when the price of an issuer’s shares increases on a stock exchange, since these transactions between buyers and sellers do not involve the issuer.
Example of Additional Paid-In Capital
A technology startup, MegaTech Inc., issues 1,000,000 shares of common stock with a par value of $0.01 per share to raise funds for expansion. The company offers these shares to investors at $5.00 per share. The total amount raised from the issuance is $5,000,000 (1,000,000 shares × $5.00). However, only $10,000 (1,000,000 shares × $0.01 par value) is recorded as common stock on the balance sheet, reflecting the legal capital based on par value.
The remaining $4,990,000 ($5,000,000 – $10,000) is recorded as additional paid-in capital. This amount represents the excess investors are willing to pay above the par value, indicating investor confidence in the company’s potential.
Terms Similar to Additional Paid-In Capital
Additional paid-in capital is also known as contributed capital in excess of par.