ADDITIONAL PAID-IN CAPITAL

By  WILL KENTON

Updated Aug 23, 2019

What Is Additional Paid-In Capital?

Additional paid-in capital (APIC), is an accounting term referring to money an investor pays
above and beyond the par value price of a stock. Often referred to as "contributed capital in
excess of par”, APIC occurs when an investor buys newly-issued shares, directly from a
company, during its initial public offering (IPO) stage. Therefore, APICs, which are itemized
under the “shareholder’s equity” section of a balance sheet, are viewed as profit opportunities
for companies, who receive excess cash from stockholders.

[Important: Additional paid-in-capital is recorded at the initial public offering (IPO) only; the
transactions that occur after the IPO do not increase the additional paid-in capital account.]

Additional Paid-In Capital

How Does Additional Paid-In Capital Work?

Investors may pay any amount greater than par

During its IPO, a firm is entitled to set any price for its stock that it sees fit.
Meanwhile, investors may elect to pay any amount above this declared par value of a share
price, which generates the additional paid-in capital.
Let us assume that during its IPO phase, the XYZ Widget Company issues one million shares of
stock, with a par value of $1 per share, and that investors bid on shares for $2, $4, and $10
above the par value. Let us further assume that those shares ultimately sell for $11,
consequently making the company $11 million. In this instance, the additional paid-in capital is
$10 million ($11 million minus the par value of $1 million). Therefore, the company’s balance
sheet itemizes $1 million as "paid-in-capital," and $10 million as "additional paid-in capital".

And after the IPO?

Once a stock trades in the secondary market, an investor may pay whatever the market will
bear. When investors buy shares directly from a given company, that corporation receives and
retains the funds as paid-in-capital. But after that time, when investors buy shares in the open
market, the generated funds go directly into the pockets of the investors selling off their
positions.
Understanding Additional Paid-In Capital Further
Adds to shareholders' equity
Additional paid-in capital is an accounting term, whose amount is generally booked in the
shareholders' equity (SE) section of the balance sheet.

PAR VALUE

Due to the fact that additional paid-in capital represents money paid to the company, above
the par value of a security, it is essential to understand what par actually means. Simply put,
“par” signifies the value a company assigns to stock at the time of its IPO, before there is even a
market for the security. Issuers traditionally set stock par values deliberately low—in some
cases as little as a penny per share, in order to preemptively avoid any potential legal liability,
which might occur if the stock dips below its par value.
Market value
Market value is the actual price a financial instrument is worth at any given time. The stock
market determines the real value of a stock, which shifts continuously, as shares are bought
and sold throughout the trading day. Thus, investors make money on the changing value of a
stock over time, based on company performance and investor sentiment.
Key Takeaways
 Additional paid-in capital is the difference between the par value of a stock and the price
that investors actually pay for it.
 To be "additional" paid-in capital, an investor must buy the stock directly from the
company at its IPO.
 The additional paid-in capital is usually booked as shareholders' equity on the balance
sheet.

Why Is Additional Paid-In Capital Important?

For common stock, paid-in-capital consists of a stock's par value and additional paid-in capital--

the latter of which may provide a substantial portion of a company's equity capital,
before retained earnings begin to accumulate. This capital provides a layer of defense against
potential losses, in the event that retained earnings begin to show a deficit. 
What is Additional Paid In Capital?

Additional Paid In Capital (APIC) is the value of share capital

above its stated par value and is an accounting item under
Shareholders’ Equity on the balance sheet. APIC can be
created whenever a company issues new shares and can be
reduced when a company repurchases its shares. APIC is
also commonly referred to as Contributed Surplus or
Contrbuted Capital in Excess of Par.

 
 
How Additional Paid In Capital is Created

As you can see with Facebook, in the example above,

Additional Paid In Capital is created as a result of issuing
shares at a price higher than their par value.

As of September 30, 2017, Facebook has issued $40.199

billion of share capital, all of which is listed as APIC on its
balance sheet. Since the par value of its common stock is
only $0.000006 per share, the total is less than $1 million
(which is the units it reports in) so it shows as zero on the
balance sheet.

Additional Paid In Capital is only dependent on the issue

price of equity, not the current market value.  Once a
company’s shares start trading on a public exchange, their
price movements don’t impact the APIC account on the
balance sheet.

 
Sample Calculation

Let us break down the above example into some basic steps
to see how the additional paid-in capital is calculated.  Here
is some more detail from the front page of the company’s
10-Q quarterly report.

 
 
Step 1

Take the total Class A common shares outstanding of 2.38

billion and multiply them by $0.000006 par value per share.

= $14,309

 
Step 2

Take the Class B common shares of 500 million and multiply

them by $0.000006 par value.

= $3,000

 
Step 3

Add the Class A and Class B totals together to get $17,309.

 
Step 4

Divide $17,309 by 1 million to get the appropriate units on

the balance sheet, which rounds to $0.0 million.

 
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Applications in Financial Modeling

When performing financial modeling in Excel, it’s important

to properly account for a company’s share capital and total
shareholders’ equity.

A separate schedule in the model can be created to track

the par value, issue price, and any new issuance or
repurchase of shares.
The issuance of equity impacts the cash flow
statement (financing cash flow), as well as the balance sheet,
as shown below:

 
What Is the Difference Between Paid-in
Capital & Additional Paid-in Capital?
•••
By: Sue-Lynn Carty
Reviewed by: Ryan Cockerham, CISI Capital Markets and Corporate Finance
Updated October 17, 2018
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.

How to Calculate for Stock Issuances

By: Sue-Lynn Carty
Updated April 19, 2017
Companies issue stock to raise additional business capital. Companies may choose to
raise additional capital for a number of reasons, but typically do so for expansion and
acquisition purposes. Companies must calculate stock issuances to not only
determine how much capital they are raising but also to enter the sale transaction in
their accounting general ledger.

Calculate for Stock Issuances

Obtain the number of shares issued and price per share of issued stock. You will find
both of these figures on the Statement of Shareholder’s Equity.
Multiply the number of shares issued by the price per share. Doing this calculation
gives you the amount of cash raised by the sale of the stock. For example, if the
company issues 100 shares at $10 per share, the result is $1,000 of additional capital
raised from stock issuances.
Calculate stock issuances for par value. It’s rare that a company assigns par value to
a stock, but if they are required to by state law, then you would calculate stock
issuance by multiplying the par value by the number of shares issued. For example, if
a company issues 100 common stocks for a par value of $1, the calculation is 100 x
$1 = $100.

Account for Stock Issuances

Debit the cash account. To account for the cash inflow from the stock issuance, debit
the cash account in the general ledger for the amount received from the stock
issuance. For instance, if a company issues 100 shares at $10 per share, the resulting
cash inflow is $1,000. You would debit the cash account for $1,000.
Credit the Common Stock account. You credit the Common Stock account to reflect
the increase in the common stock account. For instance, if a company issues 100
shares at $10 per share, the resulting increase in the common stock account is
$1,000. You would credit the common stock account for $1,000.
Credit paid in capital in excess of par. You enter this amount only if the company
assigned the stock a par value. For example, if a company issues 100 shares at $10
per share, with a par value of $1. The amount of money received from the sale is
$1000. You debit cash for $1,000. You debit common stock for the par value which is
$1 x 100= $100. You then debit paid in capital in excess of par for the difference
between the total cash amount received per share and the par value which is $1000 -
$100 = $900.