Actual paid in capital for newly issued shares can be very different from stated par value for the same shares.
What is paid in capital (contributed capital)?
Paid in capital (also called contributed capital) is a Balance sheet item, showing funds that stockholders have invested through purchase of stock from the issuing company.
When investors buy shares directly from the company, that is, the company receives and keeps the funds as contributed capital (paid in capital). When they buy shares on the open market, of course, funds go to the investor selling them.
Paid in Capital Adds to Owners Equity
Contributed (paid in capital) capital is one of the two main categories on the Balance sheet under owner’s equity (the other is retained earnings). Contributed capital, in turn, has two main components:
- Stated capital, which is usually defined as the stated, or par value of the shares of stock that have been issued (the stated capital is listed on the Balance sheet below is the sum of values listed as "Preferred stock" and "Common stock.").
- Additional paid-in capital, which represents money paid to the company above the par value.
Explaining Paid in Capital in Context
Sections below show how paid in capital items appear on the Balance Sheet. The creation of new paid in capital is explained in context with related accounting and finance terms, including the following:
Contents
- What is paid in capital (contributed capital)?
- How do firms acquire paid in capital (contributed capital) when they issue new shares of stock?
- Where does contributed capital appear on the Balance sheet?
Related Topics
- For a complete introduction to Owners Equity on the Balance Sheet, see Owners Equity.
- The article Stock Bond Par Value explains the meaning of Par for new stock share issues.
- See Balance Sheet, for a complete introduction to Balance sheet structure, contents, and role in financial reporting.
Acquiring Contributed Capital
Investors Pay Issuers in Excess of Par
At a public stock offering, the difference between a stock share par value and the actual market price can be large. Par value for a stock is an accounting convention for the price initially set by the company. The concept came into use as a way of letting companies announce publicly that they will sell no shares below a certain price (par), so as to assure investors that no one will receive more favorable prices.
At a company's IPO (Initial public offering), however, the market price can rise far above par, especially if the investing public has high expectations for company growth and company performance. The same difference may appear at the company's secondary, and subsequent stock offerings to the public. In brief, par value says little about the market's confidence in the company or potential future stock prices. What investors are willing to pay, in excess of par, however, is viewed as an indicator of future performance. For this indicator, they can look to the separate components of contributed capital on the Balance sheet.
Paid in Capital on the Balance Sheet
Except Cost Savings and Avoided Costs
Contributed capital (paid in capital) entries on the Balance sheet show up under Owner's Equity, as shown in the lower part of the Exhibit 1 Balance sheet, below.
| Grande Corporation Figures in $1,000's Balance Sheet at 31 December 20YY |
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| ASSETS Current Assets Cash Short-term investments Accounts receivable Notes receivable short term Inventories Prepaid exp, insurance, def taxes Total Current Assets Long-Term Investments and Funds Property, Plant & Equipment Intangible Assets Other Assets Total Assets |
1,369 137 1,832 20 5,986 265 |
9,609 1,460 9,716 1,222 68 22,075 |
|
| LIABILITIES Current Liabilities Long Term Liabilities Total Liabilities |
3,464 5,474 8,938 |
||
| OWNERS EQUITY Contributed Capital Preferred stock Common stock Contributed capital excess of par Total Contributed Capital Retained Earnings Total Owners Equity |
3,798 4,184 1,457 |
9,439 3,698 |
13,137 |
| Total Liabilities and Equities |
22,075 | ||
