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. 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.
For example, the board of directors of a business authorizes 10,000,000 shares of common stock at a par value of $0.01. The company then sells 1,000,000 of these shares for $5 each. To record the receipt of cash, the company records a debit of $5,000,000 to the cash account, $10,000 to the common stock account, and $4,990,000 to the additional paid-in capital account.
The additional paid-in capital account and the retained earnings account typically contain the largest balances in the equity section of the balance sheet.
Additional paid-in capital is also known as contributed capital in excess of par.