What Is Paid-In Capital?
Paid-in capital is the amount of capital "paid in" by investors during common or preferred stock issuances, including the par value of the shares themselves plus amounts in excess of par value. Paid-in capital represents the funds raised by the business through selling its equity and not from ongoing business operations.
Paid-in capital also refers to a line item on the company's balance sheet listed under stockholders' equity, often shown alongside the line item for additional paid-in capital.
- Paid-in capital is the full amount of cash or other assets that shareholders have given a company in exchange for stock, par value plus any amount paid in excess.
- Additional paid-in capital refers to only the amount in excess of a stock's par value.
- Paid-in capital is reported in the shareholder’s equity section of the balance sheet.
- It is usually split into two different line items: common stock (par value) and additional paid-in capital.
Understanding Paid-In Capital
For common stock, paid-in capital, also referred to as contributed capital, consists of a stock's par value plus any amount paid in excess of par value. In contrast, additional paid-in capital refers only to the amount of capital in excess of par value or the premium paid by investors in return for the shares issued to them. Preferred shares sometimes have par values that are more than marginal, but most common shares today have par values of just a few pennies. Because of this, "additional paid-in capital" tends to be essentially representative of the total paid-in capital figure and is sometimes shown by itself on the balance sheet.
Additional paid-in capital can provide a significant part of a company's capital before retained earnings start accumulating through multiple years of profit, and it is an important capital layer of defense against potential business losses after retained earnings have shown a deficit. Short of the retirement of any shares, the account balance of paid-in capital, specifically the total par value and the amount of additional paid-in capital, should remain unchanged as a company carries on its business.
Paid-in Capital From Sale of Treasury Stock
Companies may buy back shares and return some capital to shareholders from time to time. The shares bought back are listed within the shareholders' equity section at their repurchase price as treasury stock, a contra-equity account that reduces the total balance of shareholders' equity.
If the treasury stock is sold at above its repurchase price, the gain is credited to an account called "paid-in capital from treasury stock." If the treasury stock is sold at below its repurchase price, the loss reduces the company's retained earnings. If the treasury stock is sold at equal to its repurchase price, the removal of the treasury stock simply restores shareholders' equity to its pre-buyback level.
Paid-in Capital From Retirement of Treasury Stock
Companies may opt to remove treasury stock by retiring some treasury shares, rather than reissuing them. Once retired, shares are cancelled and cannot be reissued at a later date. The retirement of treasury stock reduces the balance of paid-in capital applicable to the number of retired treasury shares.
If the initial repurchase price of the treasury stock was lower than the amount of paid-in capital related to the number of shares retired, then "paid-in capital from retirement of treasury stock" is credited. If the initial repurchase price of the treasury stock was higher than the amount of paid-in capital related to the number of shares retired, then the loss reduces the company's retained earnings.