Paid in capital definition
/What is Paid In Capital?
Paid in capital is the payments received from investors in exchange for an entity's stock. This is one of the key components of the total equity of a business. Paid in capital can involve either common stock or preferred stock. These funds only come from the sale of stock directly to investors by the issuer; it is not derived from the sale of stock on the secondary market between investors, nor from any operating activities.
Paid in capital is only comprised of funds received from the sale of stock; it does not include proceeds from ongoing company operations. The balance in paid in capital can be reduced if a corporation elects to buy back shares from its shareholders; this can be either a direct reduction of the account, or it may be listed in a contra equity account that is paired with and offsets the paid in capital account.
Example of Paid In Capital
An example of paid-in capital is when Apple Inc. issues new shares of common stock to investors. Suppose Apple decides to raise capital by offering 1 million new shares at a price of $150 per share. Investors purchasing these shares would pay a total of $150 million to the company. This amount becomes part of Apple's paid-in capital, which is recorded in the shareholders' equity section of its balance sheet. The par value of the shares (let's say $0.01 per share) would be recorded in the common stock account, while the excess amount over par value (the additional $149.99 per share) would go into the additional paid-in capital account. This infusion of cash provides Apple with resources for expansion, research and development, or other business activities.
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Accounting for Paid-In Capital
When stock is sold, the proceeds are divided into the par value of the shares sold (frequently $0.01 per share) and additional paid-in capital. This results in a debit to the cash account and credits to the common stock account and the additional paid in capital account. For example, a corporation sells 1,000 common shares with a par value of $0.01 per share, at the current market price of $20 per share. The total paid in capital is $20,000, of which $10 is recorded in the common stock account, and $19,990 is recorded in the additional paid in capital account. The journal entry used to record this transaction appears in the next exhibit.
Presentation of Paid In Capital
Paid-in capital is presented within the equity section of the balance sheet, typically separated into common or preferred stock at par value and additional paid-in capital. It is shown separately from retained earnings and accumulated other comprehensive income to distinguish owner contributions from operating results. This presentation helps users evaluate the company’s equity financing structure and capitalization.
Paid-In Capital FAQs
Is paid-in capital affected by net income or losses?
Paid-in capital is not affected by net income or losses because it represents amounts contributed by shareholders, not operating performance. Net income and losses are accumulated in retained earnings instead. As a result, paid-in capital remains unchanged by periodic earnings results.
Is paid-in capital a debit or credit?
The natural balance of the accounts that comprise paid in capital is a credit. This means that any additions to the common stock, preferred stock, and/or additional paid in capital accounts would be recorded as credits. The repurchase of shares from shareholders would result in debits to these accounts, since the account balances are being reduced.
What is the difference between paid-in capital and additional paid-in capital?
Paid-in capital is the total amount investors contribute to a corporation in exchange for stock. It includes the stock’s par or stated value plus additional paid-in capital. Additional paid-in capital is the amount investors pay above par or stated value and is reported separately within shareholders’ equity on the balance sheet.
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