Additional paid-in capital is used in calculating the amount that investors paid to receive shares in a company.
What Is Additional Paid-In Capital?
Additional paid-in capital is a journal entry on the balance sheet that represents the amount investors pay for a company’s stock above par value. It is also known as the share premium, or capital surplus. When investors buy into a company’s capital stock, that capital stock is typically sold above its par value and becomes its paid-in capital.
For publicly traded companies, additional paid-in capital is the difference between the shares’ par value and the amount investors pay for shares at a company’s initial public offering. This difference is also known as paid-in capital in excess of par value. It is included in the shareholders’ equity section of the balance sheet and may be included as part of the line item for the issuance of common and preferred stock. In other cases, it may appear as a separate line item.
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TheStreet Dictionary Terms
An entry for additional paid-in capital may be made on the balance sheet for a period whenever a company sells new shares or repurchases stock. When a company issues new shares again after its IPO, this is known as a follow-on offering (or secondary offering).
Below is an example of an entry on additional paid-in capital for Company A. The par value lists all shares being issued, which in this case represents only common stock of 1 billion shares at $0.01 par value per share. Since the IPO was priced at $15 a share, that means $15 billion in shares were sold to investors, putting its total paid-in capital at $15 billion. With the paid-in capital at $10 million, additional paid-in capital can be calculated at $14.99 billion.
| Company A sells 1 billion common shares, with a par value of $0.01 per share. Its initial public offering prices the stock at $15. | Paid-In Capital |
|---|---|
|
1 Billion Common Shares at $0.01 Par Value Per Share |
$10,000,000 |
|
Additional Paid-In Capital |
$14,990,000,000 |
|
Total Paid-In Capital |
$15,000,000,000 |
Why Is Additional Paid-In Capital Important?
If a company doesn’t list total paid-in capital on its balance sheet, additional paid-in capital is a close measure of the total, considering that the par value figure is likely to be small.
Can Additional Paid-In Capital Be Negative?
Par value is set at greater than zero, and additional paid-in capital can never be negative.
