Paid-In Capital

Paid-in capital, also called contributed capital, is the amount of money and other assets that shareholders have contributed to a corporation in return for its shares. It is one of the two main components of shareholders' equity on the balance sheet; the other is retained earnings, which represents profits kept in the business. Paid-in capital reflects what owners put in, while retained earnings reflect what the business has earned and not distributed.

In US practice, paid-in capital is usually split into two parts. The first is the par value or stated value of the shares issued, recorded in the common stock or preferred stock account. The second is additional paid-in capital (APIC), sometimes called paid-in capital in excess of par or share premium, which is the amount investors paid above par value. Because par values are usually tiny, most paid-in capital sits in APIC.

The total is:

Here the first term is the number of shares issued times their par or stated value, and $\text{Additional paid-in capital}$ is the excess received over that amount, plus certain other credits to equity.

A company issues 1,000,000 common shares with a par value of $0.01 at $12 per share, receiving $12,000,000. The journal entry debits cash $12,000,000, credits common stock $10,000 and credits additional paid-in capital $11,990,000. A year later it issues 100,000 shares of $50 par preferred stock at $52, crediting preferred stock $5,000,000 and APIC on preferred stock $200,000. Total paid-in capital is now $17,200,000. Costs of issuing shares, such as underwriting and legal fees, are deducted from APIC rather than expensed.

• Share-based compensation: as employee stock options and restricted shares vest, the expense recognized is credited to APIC.
• Treasury stock reissued above cost: if a company buys back shares and later resells them for more than it paid, the gain is credited to APIC, not to income.
• Conversion of bonds or preferred stock into common stock, recorded at the carrying amount of the converted securities.
• Donated capital, when shareholders or others give assets to the company without receiving shares.
• Capital contributions by existing owners that are not in exchange for new shares, common in private companies.

Paid-in capital shows how much of a company's equity has come from investors rather than from profits. A young growth company may have large paid-in capital and an accumulated deficit, showing that it has been funded by equity financing rather than earnings. A mature company that has paid out dividends and bought back shares for decades may have relatively small paid-in capital compared with its retained earnings. Paid-in capital is not cash and does not show what investors' shares are worth today; that depends on the market price.

The amounts also matter legally. Under state corporate law, the par or stated value portion is usually legal capital, which may not be distributed to shareholders as dividends. Some states also restrict distributions out of APIC, or require them to be identified as a return of capital. For tax purposes, a distribution that exceeds a corporation's earnings and profits is treated as a return of capital, reducing shareholders' tax basis, which is why companies track contributed capital carefully alongside the capital stock accounts and the overall accounting equation.