Paid-in Capital

What is Paid-in Capital?

Paid-in capital is the total amount a company has received from investors who have bought its stock. The figure will contain the money paid for both the listed firm’s common and preferred stock issues.

Key Takeaways

Paid-in capital is the total amount received by a company from shareholders that have bought its stock.
This figure doesn’t include the income generated by a company from its ongoing operations.
It will appear as a line on the balance sheet and includes both par value and additional paid-in capital.
Additional paid-in capital is the difference between the price paid for the share capital and the par value.
The types of stock that can affect paid-in capital are common stock, preferred stock, and treasury stock.

Understanding Paid-in Capital

Paid-in capital, which is also known as contributed capital, refers to the total amount received by a company from selling its stock and is made up of two components: par value and additional paid-in capital.

Let’s look at each in turn, starting with par value. This is the value of a single common share, as set out by a company’s charter. It’s the original face value when it was issued.

However, in many cases, the par value is often set at just $0.01, as there can be negative implications for companies if a stock’s valuation dips below par.

So, what is additional paid-in capital? This means the difference between the price paid for the share capital and the par value. This can also be known as capital in excess of par value or even capital surplus. Look for any of these terms on the company’s balance sheet.

How is Paid-in Capital Recorded

The paid-in capital figure is usually found on the balance sheet. It often sits in the shareholders’ equity section and will be referred to as both common par and additional paid-in capital.

How to Calculate Paid-In Capital

It is quite simple to calculate the paid-in capital of a company.

Here is the formula to use:

Paid-In Capital = Common Stock + Additional Paid-in Capital

Types of Stock Affecting Paid-In Capital

When we talk about a company’s stock, we refer to three different types that it may have issued.

Common stock

This is the one with which most people will be familiar. It’s a type of security that represents ownership of equity in a company. Common stock is traded on exchanges, which means it can be bought and sold by traders and fellow investors.

Preferred stock

While similar to common stock, in as much as they represent ownership of equity, holders will have priority over other investors if the company is liquidated. Other features of preferred stock may include priority in dividend payments, as well as the ability to vote on some extraordinary company events.?

Treasury stock

This refers to outstanding stock that was bought back by the issuing provider from shareholders.

This type of stock will be listed on the balance sheet at its purchase price, which reduces the total amount of shareholders’ equity.

In addition, if it’s sold above its repurchase level, it’s credited to an account that’s usually known on the balance sheet as paid-in capital from treasury stock.

Paid-In Capital vs. Earned Capital & Additional Paid-In Capital

Anyone wanting to understand the paid-in capital definition will come across various terms, and it’s important to know what each of them means.

Here, we have a box containing the key attributes of three such terms: paid-in capital, earned capital, and additional paid-in capital.

Paid-in Capital	The paid-in capital figure is the total amount that a company has received from selling its stock to shareholders.
Earned Capital	Earned capital refers to the amount of money that has been generated by a particular business through its various operations.
Additional Paid-in Capital	Additional paid-in capital is effectively the difference between the price paid for a stock and its original par value.

Paid-in Capital Examples

Let’s first take the example of a fictional company to illustrate what paid-in capital is and the elements that make it up.

The business decides to issue 200 shares, each of which will come with the usual minimum par value of $0.01.

It then sells these shares for $100 each. This generates a total of $20,000 that’s been received from shareholders.

Therefore:

Paid-in capital will be $20,000

Combined par value of the shares will be $2

Additional paid-in capital will be $19,998

A prime real life example can be found on the balance sheet of Marks and Spencer, the UK-based retailer, in which all figures are expressed in ￡ millions.

Under the heading of ‘common equity’, you can see common stock par/carry value, as well as the additional paid-in capital or capital surplus.

Paid-in Capital Examples

The Bottom Line

The paid-in capital definition is the total amount that a company receives from investors who have bought its stock.

This figure, which includes a stock’s par value and additional paid-in capital, appears as a line on the balance sheet in the shareholders’ equity section.

While paid-in capital is not a headline figure that’s regularly quoted by analysts, it’s still a useful tool when investors are building up a broad picture of a company’s equity position.