What is Additional Paid-in Capital?
Additional Paid in capital also known as Capital surplus is the excess of amount the company receives over and above the par value of shares (equity or preferred) from the investors during the time of an IPO, it can be seen as the profit which a company receives when it issues the stock for the first time in open market.
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. 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. of the company.
- Here the APIC comes in. Since each investor of the company 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 from the company (during IPO or FPO, etc.), directly, there would be APIC above par value. However, if the shares are purchased from the secondary marketSecondary MarketA secondary market is where securities are offered to the general public after being offered in the primary market. Such securities are usually listed on the stock exchange. A significant portion of trading happens in such a market and are of two types – equities and debt markets., it would not affect the APIC of the company at all.
Also, have a look at this detailed guide on Share Capital.
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 that can illustrate 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 need to 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 of all, 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., i.e., par value (stock) amount. Since that’s the legal capital, we will attribute the amount to the common stock account. The rest of the amount (issue price – par value per share) would be attributed to APIC.
So, the entry would be –
- Cash account would be debited since cash is an asset, and by receiving the whole amount (total equity capital), the company’s asset cash is increasing.
- 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. and the APIC account in their respective proportions.
Let’s say that Company Eight Nest Ltd. has the following information.
Eight Nest Ltd. has issued 10,000 shares at $50 per share. They’ve kept the par value (stock) as $5 per share. 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. 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 amount 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 million
- Shares issued for stock options of $197 million
- Share 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. is reported in the income statement. This results in lowering the net income, 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.. The contra entry for this is by increasing the additional paid-up capital.
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. per share. It is entirely dependent on the issue price. If an investor purchases shares from the company and sells off to another investor at a higher price, it would not affect the capital of the company.
Additional Paid-in Capital on Balance Sheet Video
This has been a guide to what is Additional Paid-in capital on 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 –