When running a business, it's important to know a thing or two about accounting. Take the time to familiarize yourself with the primary types of accounts and their role. Paid-in capital, for instance, impacts the statement of shareholder's equity. This balance sheet item represents the funds provided by stakeholders when they bought shares in a company.
Whether you're a startup or an established company, there will be people willing to invest in your business. They will contribute cash or assets in exchange for the issued shares. As your company grows, their shares will increase in value. Your accountant will record the amount of capital paid by stakeholders, which is known as paid-in capital or contributed capital.
Basically, this term refers to the funds raised by a company by selling either common or preferred stock. The difference between the fair market value paid for the stock and its par value is called paid-in capital in excess of par. It applies when stakeholders pay more for their shares than the par value.
The amount of capital in excess of par is known as APIC or additional paid-in capital. It represents the amount of money investors are willing to pay above the par value for their shares in your company. In general, corporations and big companies use in-house APIC accounting systems to record these transactions.
For example, if the par value is $0.05, the amount paid in by each shareholder above this value will be recorded as APIC on their equity section of the balance sheet. Think of it as profit on the common stock. The balance sheet formula for APIC is issue price minus par value multiplied by the number of outstanding shares.
The additional paid-in capital can be created every time a business issues new shares. In case a company decides to repurchase its shares, the APIC can be reduced.
The paid-in capital is reported on the equity section of the balance sheet and divided into two accounts: paid-in capital in excess of par, which represents the amount of money above the par value and common stock, which shows the total par value of all shares issued.
Let's say your small business issues 100 $1 par value shares to stakeholders. The stakeholders pay $1,000 for these shares because the company looks promising. In this case, your business will record $900 to the paid-in capital in excess of par and $100 to the common stock account. The paid-in capital would be $1,000, which represents the total amount invested in your company's shares.
Be aware that your accountant will only record the paid in capital sold directly to stakeholders. Companies that issue shares to the public do not record these transactions since they don’t actually receive any funds from investors.