Loading the player...

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. Paid-in capital represents the funds raised by the business from selling its equity, and not from ongoing operations.

Paid-in capital also refers to a company's balance sheet entry listed under stockholders' equity, often shown alongside the balance sheet entry for additional paid-in capital.

BREAKING DOWN 'Paid-In Capital'

Paid-in capital, also referred to as contributed capital, can be compared with additional paid-in capital, and the difference between the two values will equal the premium paid by investors over and above the par value of the shares. 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 representative of the total paid-in capital figure, and is sometimes shown by itself on the balance sheet.

Additional Paid-in Capital

For common stock, paid-in capital consists of a stock's par value and additional paid-in capital, the amount of capital in excess of par or the premium paid by investors in return for the shares issued to them. Additional paid-in capital can provide a significant part of a company's equity capital before retained earnings start accumulating and 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 purchase cost as treasury stock, a contra-equity account that reduces the total balance of shareholders' equity. If the treasury stock is sold at above its purchase cost, the gain is credited to an account called paid-in capital from treasury stock as part of shareholders' equity. If the treasury stock is sold at below its purchase cost, the loss reduces the company's retained earnings. If the treasury stock is sold at equal to its purchase cost, the removal of the treasury stock simply restores shareholders' equity to its pre-share-buyback level.

Paid-in Capital From Retirement of Treasury Stock

Companies may also retire some treasury shares, which is another way to remove treasury stock other than reissuing it. The retirement of treasury stock reduces the balance of paid-in capital or the amount of total par value and additional paid-in capital, applicable to the number of retired treasury shares. Depending on whether the initial purchase cost of the treasury stock is lower or higher than the amount of paid-in capital relevant to the number of shares removed, either something called paid-in capital from retirement of treasury stock is credited to shareholders' equity section, or retained earnings are debited for the additional loss of value in shareholders' equity.

RELATED TERMS
  1. New Issue

    A new issue references a security that has been registered, issued, ...
  2. Capital Surplus

    Capital surplus is equity which cannot otherwise be classified ...
  3. Share Capital

    Share capital refers to funds raised by issuing shares in return ...
  4. Balance Sheet

    A balance sheet reports a company's assets, liabilities and shareholders' ...
  5. Treasury Offering

    A treasury offering is the issuance of an additional class of ...
  6. Impaired Capital

    Impaired capital is a condition where a company’s total capital ...
Related Articles
  1. Investing

    Learn the Lingo of Private Equity Investing

    Because of the non-public nature of private equity, it can be difficult to the learn the lingo. We break it down here.
  2. Investing

    Amazon Stock: Capital Structure Analysis (AMZN)

    Analyze Amazon's capital structure to determine what roles equity and debt play in financing operations. How has Amazon's financial leverage changed over time?
  3. Investing

    Microsoft Stock: Capital Structure Analysis (MSFT)

    Analyze Microsoft's capital structure to determine the roles of debt and equity in its financing, and explore what these trends say about the cost of capital.
  4. Investing

    Twitter Stock: Capital Structure Analysis (TWTR)

    Analyze Twitter's capital structure to understand the importance of equity and debt financing. Identify trends in financial leverage and enterprise value.
  5. Investing

    UPS Stock: Capital Structure Analysis

    Analyze UPS' capital structure to determine the relative importance of debt and equity financing. Identify the factors influencing financial leverage trends.
  6. Investing

    Balance Sheet: Analyzing Owners' Equity

    Analyzing owners’ equity is an important analytics tool, but it should be done in the context of other tools such as analyzing the assets and liabilities on the balance sheet.
  7. Investing

    Nike Stock: Capital Structure Analysis (NKE)

    Analyze Nike's capital structure to understand how the business is being financed. Discover how much equity capital is used and what trends have developed.
  8. Investing

    AT&T Stock: Capital Structure Analysis (T)

    Analyze AT&T's capital structure to discover important trends in the company's financing. Find out how and why debt and equity have changed in recent years.
  9. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
RELATED FAQS
  1. What are the components of shareholder equity?

    Understanding company valuation figures, such as shareholder equity, is crucial in assessing a business. Read Answer >>
  2. Which transactions affect retained earnings?

    Retained earnings is the cumulative total of earnings or net income that have yet to be paid to shareholders. Retained earnings ... Read Answer >>
  3. What items on the balance sheet are most important in fundamental analysis?

    Read about which balance sheet items are considered most important for fundamental analysis, including cash, current liabilities ... Read Answer >>
  4. How do share capital and paid-up capital differ?

    Share capital consists of all the funds raised by a company in exchange for shares. There are various types of share capital, ... Read Answer >>
  5. How does a share premium account appear on a balance sheet?

    Learn where a share premium account shows up on a balance sheet and for what purposes funds in a share premium account may ... Read Answer >>
  6. What's the difference between a capital stock and a treasury stock?

    Learn about treasury capital stock, how to calculate a company's capital and treasury stock, and the differences between ... Read Answer >>
Trading Center