Additional Paid-In Capital

What is Additional Paid-In Capital?

Additional paid-in capital is the amount of capital contributed to a company by an investor that is greater than the par value of the issued stock. It represents the price that an investor is willing to pay for the stock in excess of its par value, in exchange for a stake in the company. It is also commonly represented on a company’s balance sheet as “capital in excess of par value.” Additional paid-in capital can be applied to either common or preferred stock.

Additional paid-in capital can only occur when an investor purchases stock directly from a company in the primary market via initial public offering (IPO). When an investor purchases from a company in the primary market, the proceeds from the sale go directly to the company issuing the stocks.

Alternatively, in a secondary market, the proceeds from the sale transfer from one investor to another who previously owned the stocks. There is no impact on the company’s financials when a sale occurs in the secondary market.

Additional Paid-in Capital Formula

The formula for additional paid-in capital is:

Additional Paid-In Capital = (Issue Price – Par Value) x Number of Shares Issued

How do I Calculate Additional Paid-in Capital?

Additional paid-in capital is calculated by taking the difference in the issue price and par value of one share of stock and multiplying it by the total number of shares issued by the company.

Factors that affect additional paid-in capital:

  • Issue price of stock
  • Par value of stock
  • Number of shares issued

Issue Price

The issue price of stock is the price at which shares are initially sold by a company in the primary market when they are first offered to the public (IPO – Initial Public Offering).

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Par Value

The par value of stock is the per share value that is initially set by an issuing company. It may appear on the paper stock certificate or in the company’s articles of incorporation. Unlike market value, the par value of the stock is a set amount that does not fluctuate over time. It is usually lower than the issue price. Companies set artificially low par values so that initial investors do not need to make substantial investments in order to contribute capital to the company upon startup.

Where Does Additional Paid-in Capital Appear on the Financial Statements?

Additional paid-in capital, or capital in excess of par value, appears in the shareholder’s equity section of a company’s balance sheet. The balance sheet depicts a company’s financial position at a specific point in time. It is the accumulation of all prior activities that have occurred since the opening of the business.

Shareholder’s equity is a section that includes capital contributed to the company plus its retained earnings from all prior years in business. It is equivalent to the company’s assets minus its liabilities – the other two sections that appear on a balance sheet.

Additional paid-in capital appears directly below the line item for the relevant common stock or preferred stock. The par value of the issued stock goes to the common or preferred stock line, while the amount paid by investors above and beyond the par value goes to the additional paid-in capital line. The total of the two lines equals the total paid-in capital.

When a stock sale occurs in the primary market, the company will debit cash- an asset account- for the total amount of money the company received from the sale. It simultaneously credits both the relevant stock account and the additional paid-in capital accounts – under shareholder’s equity – for the amounts determined by the formula above.

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What is the Difference Between Additional Paid-in Capital and Paid-in Capital?

Paid-in capital, also commonly referred to as contributed capital, is the total amount of capital contributed to a company as a result of a sale of stocks in the primary market. Paid-in capital includes both the par value of the stocks and the additional paid-in capital. On the other hand, additional paid-in capital only includes the amount in excess of the par value of the stocks.

Example of Additional Paid-In Capital

During its initial public offering, ABC Company issued ten thousand shares of common stock at a par value of $.50 per share. Investors purchased the stocks at $10 per share. The company made $100,000 on the sale. Its additional paid-in capital is $95,000.

Calculating Additional Paid-In Capital:

  • Paid-in capital = $10 issue price x 10,000 shares = $100,000
  • Additional paid-in capital = ($10 issue price – $.50 par value) x 10,000 shares = $95,000
  • Common stock on balance sheet = $100,000 – $95,000 = $.50 par value x 10,000 shares = $5,000

When ABC Company records this transaction on its books, it debits $100,000 to a cash account. Cash appears on the balance sheet under the asset section. ABC Company would also record $5,000 in common stock and $95,000 in its additional paid-in capital accounts. The total of both lines- which appear in the shareholder’s equity section on the balance sheet- equals the total paid-in capital, $100,000.

Real Company Example: Walmart Additional Paid-In Capital

On its consolidated balance sheet as of January 31, 2023, Walmart Inc. reported $4.969 billion of capital in excess of par value, also known as additional paid-in capital. As of the prior year, January 31, 2022, Walmart Inc. reported $4.839 billion.

According to this balance sheet, Walmart Inc. has issued common stock with a par value of $269 million as of January 31, 2023. The additional paid-in capital was $4.969 billion at that time. The total paid in-capital was, therefore, $5.238 billion, as of January 2023.

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Calculating Additional Paid-In Capital:

  • Common stock = $269 million
  • Additional paid-in capital = $4.969 billion (capital in excess of par value)
  • Paid-in capital = $269 million + $4.969 billion = $5.238 billion

Additional Paid In-Capital FAQ

Q: How is additional paid-in capital calculated?

A: Additional paid-in capital is calculated as the difference between the total amount paid by an investor to a company for common or preferred stock and its par value. The amount paid in excess of the par value is the additional paid-in capital.

Q: Why can additional paid-in capital only be created in the primary market?

A: When an investor purchases stocks from a company in the primary market, the sales proceeds go directly to the company issuing the stocks. When an investor purchases stocks in the secondary market, the sales proceeds go to the investor who owned the stocks prior to the new investor. Secondary market sales do not impact the company’s balance sheet at all.

Q: Are additional paid-in capital and paid-in capital the same thing?

A: Paid-in capital includes the entire amount paid to a company by an investor in exchange for stock. Additional paid-in capital includes only the portion of paid-in capital that is in excess of the stock’s par value.

Q: What other term can be used to describe additional paid-in capital on a company’s financial statement?

A: Capital in excess of par value is another term you may see on a balance sheet rather than additional paid-in capital.

Additional Resources

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