Additional paid-in capital definition
/What is Additional Paid-In Capital?
Additional paid-in capital is any payment received from investors for stock that exceeds the par value of the stock. The concept applies to payments received for either common stock or preferred stock . Par value is typically set extremely low, so most of the amount paid by investors for stock will be recorded as additional paid-in capital. Par value is commonly set at $0.01, and is printed on the stock certificate. Low par values are used because many state governments mandate that shares cannot be sold at prices below their par values.
There is no change in the additional paid-in capital account when a company's shares are traded on a secondary market between investors, since the amounts exchanged during these transactions do not involve the company that issued the shares.
The additional paid-in capital account and the retained earnings account typically contain the largest balances in the equity section of the balance sheet .
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How to Increase Additional Paid-In Capital
The recorded amount of additional paid-in capital can only increase when an issuer sells more stock to investors, where the price at which the shares are sold exceeds the par value of the shares. There is no impact on additional paid-in capital when the price of an issuer’s shares increases on a stock exchange , since these transactions between buyers and sellers do not involve the issuer.
Example of Additional Paid-In Capital
The board of directors of a business authorizes 10,000,000 shares of common stock at a par value of $0.01. The company then sells 1,000,000 of these shares for $5 each. To record the receipt of cash, the company records a debit of $5,000,000 to the cash account, a credit of $10,000 to the common stock account, and a credit of $4,990,000 to the additional paid-in capital account.
Terms Similar to Additional Paid-In Capital
Additional paid-in capital is also known as contributed capital in excess of par.
