Paid-in capital is the money a company receives from selling its stock. If the stock has a par value or stated value, then the additional paid-in capital is the money the company received from the stock sale that was in excess of par value.
Assessing Paid-in Capital
When companies issue an initial public offering (IPO), additional shares or a secondary offering, they do so in the primary market. Companies only receive money from the proceeds of sales conducted in the primary market, generally selling in individually arranged deals to large institutional investors. When it receives stock sale proceeds, the company debits its cash account and credits its common stock or preferred stock account.
When investors who bought the stock in the primary market decide to sell their shares to other investors, they do so in the secondary market, which includes common stock exchanges like the New York Stock Exchange and NASDAQ. Companies do not receive paid-in capital for shares sold in the secondary market, since those shares are being bought and sold by third-party investors, not by the company itself.
Understanding Par Value
Some states require companies to assign a par or stated value to its stock; however, the par value or stated value is for bookkeeping purposes only and is not a reflection of the actual market value of the stock. Par value is the insignificant face value a company gives its stock. It is not uncommon for publicly traded companies to assign their stock a par value of one cent or less than one cent.
Additional Paid-in Capital
When a company issues stock with a par or stated value, it records the sale as a debit to cash for the total amount of money they received from the sale. The company then credits the common or preferred stock account for the par value. The company then credits the additional paid-in capital or paid-in capital in excess of par, for money that was paid for the stock in excess of par.
Paid-in Capital Scenarios
A company issues stock for $10 per share with a par value of $0.20 per share. The company sells 100 shares, making $1,000 in proceeds from the sale. The additional paid-in capital is the issue price minus par value multiplied by the number of shares issued. So, ($10 - $0.20) x 100 = $980. To record this transaction, the company debits cash for $1,000, credits common stock for $20 and credits paid-in capital in excess of par for $980.