What is Additional Paid-in Capital?

The Par value of a stockPar Value Of A StockPar value of shares is the minimum share value determined by the company issuing such shares to the public. Companies will not sell such shares to the public for less than the decided value.read more is the minimum amount that must be paid to own a share. It means that to acquire a share, this base amount has to be paid.

  • For example, if a share is issued at $50 per share and its par value is $5 per share, we will conclude that $5 per share is the minimum amount that must be paid to acquire the share. This base amount is also called the legal capitalLegal CapitalLegal capital is defined as a portion of a firm’s equity that is not permitted to leave the business. It is an amount that cannot be distributed to shareholders as a dividend or in any other way.read more of the company.Here the APIC comes in. Since each company investor pays the whole amount (i.e., the issue price) to acquire one share, anything above par value is APIC.Therefore, Additional Paid-in Capital Formula = (Issue Price – Par Value) x number of shares issued.If 100 shares are issued, then, APIC = ($50 – $5) x 100 = $4,500

There’s another thing you need to consider while calculating additional paid-in capital. If the shares are purchased directly from the company (during IPO or FPO, etc.), there would be APIC above par value. However, if the shares are purchased from the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more, it would not affect the company’s APIC.

Also, have a look at this detailed guide on Share Capital.

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Additional Paid-in Capital Example

Let’s take an example to understand APIC on the balance sheet better.

Let’s say that Company Infinite Inc. has issued equity shares of 10,000 at $50 per share. The par value of each share is $1 per share. Find out the APIC.

This is an easy-to-understand example illustrating how to approach additional paid-in capital on the balance sheet.

Infinite Inc. has issued 10,000 equity shares at $50. That means the total equity capital would be = (10,000 * $10) = $500,000.

  • The catch is par value per share is just $1. That means we must attribute the corresponding amount to par value (stock). Here the par value would be = (10,000 * 1) = $10,000.And the rest would be additional paid-in capital on the balance sheet as it is over and above the par value. That means the APIC formula = ($50 – $1)/share = $49 per share. Then, the total APIC would be = (10,000 * $49) = $490,000.

Additional paid-in capital Accounting Entries

How would we pass the accounting entry?

First, we need to think about the legal capitalLegal CapitalLegal capital is defined as a portion of a firm’s equity that is not permitted to leave the business. It is an amount that cannot be distributed to shareholders as a dividend or in any other way.read more, i.e., par value (stock) amount. Since that’s the legal capital, we will attribute the amount to the common stock account. Then, the remaining amount (issue price – par value per share) would be attributed to APIC.

So, the entry would be –

  • The cash account would be debited since cash is an asset, and the company’s asset cash is increasing by receiving the whole amount (total equity capital).We would credit the common stock accountStock AccountStock accounting is the process of recording the transactions entered into by a business enterprise beginning with investments made by anyone, whether a corporation or an individual, in the company in exchange for the issuance of something that can be easily traded in the open market.read more and APIC accounts in their respective proportions.

Examples

Let’s say that Company Eight Nest Ltd. has the following information.

Eight Nest Ltd. has issued 10,000 shares at $50 per share. However, they’ve kept the par value (stock) at $5 per share. So we need to pass the accounting entryAccounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more for additional paid-in capital on the balance sheet.

  • Here, we know that the issued number of equity shares is 10,000, and the issue price per share is $50. That means the total equity capital is = (10,000 * $50) = $500,000.The par value is also mentioned i.e. $5 per share. That means, the total amount of par value is = (10,000 * $5) = $50,000.The rest would be attributed to APIC. The total APIC would be = [10,000 * ($50 – $5)] = [10,000 * $45] = $450,000.

Now, we will pass the accounting entry –

Reasons for Changes in Additional paid-in Capital on Balance Sheet

Please see below the snapshot. We note that APIC has been changing each year.

We note that the changes in the APIC of Colgate are due to three reasons.

  • Share-based compensation expense of $127 millionShares issued for stock options of $197 millionShare issued for restricted stock awards

Share-based compensation expenseShare-based Compensation ExpenseStock-based compensation also called share-based compensation refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders and the employees of the company.read more is reported in the income statement. This lowers the net incomeNet IncomeNet income for individuals and businesses refers to the amount of money left after subtracting direct and indirect expenses, taxes, and other deductions from their gross income. The income statement typically mentions it as the last line item, reflecting the profits made by an entity.read more, thereby reducing the shareholder’s equity through the retained earnings sectionRetained Earnings SectionRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more. The contra entry for this is by increasing the additional paid-up capital.

Conclusion

Additional paid-in capital on the Balance Sheet has nothing to do with the market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more per share. It is entirely dependent on the issue price. If an investor purchases shares from the company and sells them off to another investor at a higher price, it would not affect the company’s capital.

Additional Paid-in Capital on Balance Sheet Video

This has been a guide to Additional Paid-in capital on the Balance Sheet? Here we discuss its examples, formula, accounting entries, and reasons for changes over the years. You may also go through the following recommended posts on basic accounting –

  • Journal Entry for Prepaid ExpensesComparative Balance Sheet FormatCurrent and Capital Account DifferencesCalculate Share Capital