- Shareholders Equity
- Shareholders Equity Statement
- Equity Formula
- Paid in Capital
- Shareholder's Equity Formula
- Equity Examples
- Shares Issued
- Proxy Statement
- Negative Shareholders Equity
- Par Value of Stock
- Nominal Value of Shares
- Par Value of Share
- Premium on Stock
- Ordinary Shares Capital
- Share Classes
- Ordinary Shares
- Book Value of Equity
- Book Value Formula
- Shares Premium
- Share Capital
- Stock Certificate
- Common Stock Formula
- Class A Shares
- Diluted Shares
- Global Depository Receipts (GDR)
- Stock Dilution
- Floating Stock
- Outstanding Shares (Definition, Formula) | Stocks Outstanding
- Issued vs Outstanding Shares
- Additional Paid-in Capital on Balance Sheet
- Retained Earnings (Formula, Examples) | How to Calculate?
- Retained Earnings Formula
- Statement of Retained Earnings
- Appropriated Retained Earnings
- Unappropriated Retained Earnings
- Statement of Retained Earnings Examples
- How to Calculate Net Worth of a Company | Formula | Top Examples
- Net Worth Formula
- Tangible Net Worth
- Owners Equity
- Owner's Equity Formula
- Owner's Equity Examples
- Preferred Shares
- Callable Preferred Stock
- Redeemable Preference Shares
- Non-Cumulative Preference Shares
- Participating Preferred Stock
- Weighted average Shares average outstanding
- Share Buyback
- Accelerated Share Repurchase
- Restricted Stocks Units (RSUs)
- Contingent Shares
- Stock Splits Share
- Reverse Stock Split
- Treasury Stock Shares
- Dilutive Securities
- Anti Dilutive Securities
- Dividend Policy
- Types of Dividends
- Dividend Examples
- Is Dividend Expense?
- Dividend Policy Types
- Dividend Reinvestment Plan
- Dividends Ex-Date vs Record Date
- Dividend Declared
- Dividend Payable
- Stock Dividend
- Cash Dividend
- Final Dividend
- Preferred Dividends
- Homemade Dividends
- Ex dividend date
- Date of Record of dividends
- Qualified vs Ordinary Dividend
- Equity vs Royalty
- Commodity vs Equity
- Shares vs Debentures
- Equity vs Shares
- Equity Shares vs Preference Shares
- Wealth vs Profit Maximization
- Cost of preferred Stock
- Common Stock vs Preferred Stock | Top 8 Differences You Must Know
- Stocks Vs Shares
- Shares Vesting
- Stock Warrant
- Employee Stock Option Plan (ESOP)
- Non-Qualified Stock Options
- Stock Options Vs RSU
- Shareholder Equity vs Net Worth | Top 5 Differences You Must Know!
- Stock vs Option
- Stock vs Mutual Funds
- Accounting Basics (80+)
- Bookkeeping (52+)
- Balance Sheet (30+)
- Assets (109+)
- Liabilities (68+)
- Income Statement (158+)
- Cash Flow Statement (17+)
- Accounting Careers (27+)
- Accounting Books (8+)
- Budgeting in Finance (31+)
What is Share Capital?
The share capital is the amount of money and property a company receives through their equity financing. It is an important aspect of a business because it reflects how much a company has earned through equity shares at the time of IPO.
Let’s take a simple example to illustrate this. Let’s say that Roar Inc. has had IPO 6 years ago and by selling equity shares to the general public, Roar Inc. has sourced $1 million in the capital. Since then Roar Inc. has become a big name and its market value has become $5 million. However, since Roar Inc. has raised only $1 million through equity financing 6 years ago, the balance sheet will reflect the same only (and not $5 million).
If Roar Inc. would issue new shares of $0.5 million, then the balance sheet of Roar Inc. would be reflecting $1.5 million.
This share capital example teaches us two important aspects –
- First, it has nothing to do with the market value of the company. No matter what the market value is at today’s time, the balance sheet of the company will also record what it earned at the time of IPO.
- Second, it only takes into account the issued price. If a firm issues 10,000 shares at $10, its capital would be $100,000. Now if after 5 years, the market price of each share becomes $100, the capital will only be $100,000 until the firm issues any new shares.
Share Capital Formula
Below are the list of formulas that you can use –
Now, this share capital formula can look like a simple formula, but we need to break down issue price into two main components. – par value and additional paid in capital. The next formula takes care of that.
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Formula #2 (with Par Value)
The two main components of issue price are par value and additional paid-in capital.
- Par value is the amount that a firm can call its legal capital. In other words, par value is the minimum amount of price a shareholder must pay to acquire one share of the company.
- Additional paid-in capital is the amount that is the excess of par value. If we deduct par value from the issue price, we will get additional paid-in capital.
Share Capital Formula #3 (No Par Value)
If a company issues shares at no par value; then there would be no additional paid-in capital. We would create a “contributed surplus” account and transfer the whole amount to that.
- Let’s say that Company B has issued 10,000 at $10 per share with no par value. Here, we would transfer the whole amount i.e. ($10 * 100,000) = $1 million to “contributed surplus” account. And there will be no additional paid-in capital.
- The concept of additional paid-in capital will come only when there would be a par value per share.
Let’s take a share capital calculation example to illustrate this.
Let’s say that Yolks Ltd. has issued 100,000 shares at the issue price of $10 per share. Now, the par value is $1 per share. Calculate share capital and its par value amount and the additional paid-in capital portions.
The total capital would be (by using the formula) –
- Share capital formula = Issue Price per Share * Number of Outstanding Shares
- = $10 * 100,000 = $1 million.
Now, it has two portions – par value amount and additional paid-in capital amount.
Here, the par value per share is $1. Then the total par value amount would be –
- Total Par Value Amount = ($1 * 100,000) = $100,000.
- If the par value per share is $1 per share and if the issue price per share is $10 per share, then the additional paid-in capital per share would be = ($10 – $1) = $9 per share.
- That means the total additional paid in capital would be – Additional Paid in Capital = ($9 * 100,000) = $900,000.And if we add the total par value amount and the additional paid-in capital, we will get the same amount that we got by multiplying the issue price per share and the number of outstanding shares.
Starbucks – Share Capital Calculation Example
Let us have a look at the Shareholders’ Equity section of Starbucks.
source: Starbucks SEC Filings
- Starbucks (2017) = Common Stock (2017) + Additional paid in capital (2017)
- Starbucks (2017) = 1.4 + 41.1 = $42.5 million
- Starbucks (2016) = Common Stock (2016) + Additional paid in capital (2016)
- Starbucks (2016) = 1.5 + 41.1 = $42.6 million
Share capital and Balance Sheet
When a company needs more money, it can raise the required capital in multiple ways. It can issue bonds or it can take debt from a bank or a financial institution. It can also take the help of equity shares and raise capital.
But how does it helps the company balances the assets and the liabilities? When a company issues equity/preferred shares, it receives cash. Cash is an asset. And as the company is liable to the shareholders, share capital would be a liability. So by debiting the cash (or recording the cash as an asset) and crediting the share capital (or recording it as a liability), a company can balance both its assets and liabilities.
Share Capital Video
This has been a guide to what is Share Capital. Here we discuss share capital formulas along with practical examples including that of Starbucks share capital calculation. You may learn more from the following recommended accounting articles –