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 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 shareholders' equity (also referred to as 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 shareholders' equity section of the balance sheet.
- It is usually split into two different line items: common stock (par value) and additional paid-in capital.
- Paid-in capital can be a significant source of capital for projects and can help offset business losses.
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 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. The retirement of treasury stock reduces the balance of paid-in capital, applicable to the number of retired treasury shares.
Once treasury shares are retired, they are canceled and cannot be reissued.
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 the 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.
Example of Paid-In Capital
To illustrate, say Company B issues 2,000 shares of common stock, with a par value of $2 per share. The market price per share, however, is $20 per share. Paid-in capital is the total amount paid by investors for common or preferred stock. Therefore, the total paid-in capital is $40,000 ($4,000 par value of the shares + $36,000 amount of additional capital in excess of par).
In the shareholders' equity section of Company B's balance sheet, $36,000 is recorded next to the line item "Paid-in Capital in Excess of Par," while $4,000 is recorded next to the line item "Common Stock." The figures combined equal the total paid-in capital.
Paid-In Capital FAQs
How Is Paid-In Capital Calculated?
Paid-in capital is the total amount received from the issuance of common or preferred stock. It is calculated by adding the par value of the issued shares with the amounts received in excess of the shares' par value.
How Do You Record Paid-In Capital?
Paid-in capital is recorded on the company's balance sheet under the shareholders' equity section. It can be called out as its own line item, listed as an item next to Additional Paid-in Capital, or determined by adding the totals from the common or preferred stock and the additional paid-in capital lines.
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 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.
What Is the Difference Between Common Stock and Paid-In Capital?
Common stock is a component of paid-in capital, which is the total amount received from investors for stock. On the balance sheet, the par value of outstanding shares is recorded to common stock, and the excess (market price-par value) is recorded to additional paid-in capital. The sum of common stock and additional paid-in capital represents the paid-in capital.