What Does Additional Paid-In Capital Mean as Part of Shareholder Equity?

Selling shares on an exchange is a common method for companies to raise additional paid-in capital

The shareholder equity section of a firm's balance sheet concerns the ownership interest in the company from an accounting perspective. It equals assets minus liabilities and is what would be left over for the firm's owners if the company was liquidated. Additional paid-in capital is an account in this section of the balance sheet.

Recording the Transaction

When a company raises cash to start up its operations or to fund expansion, it can sell shares to investors. These shares represent ownership interest in the company. To record this transaction, the financial statements would record a debit in the cash account in the asset side of the balance sheet and a credit in the shareholders' equity side of the balance sheet. Additional paid-in capital would be one account credited in this circumstance.

Par Value of Common Stock

The other account credited would be the common stock account. This account lists the number of shares outstanding and multiplies that by the par value per share. The par value per share is designated by the firm when it first sells shares to investors and is often a small number, such as a penny per share or a dime per share. Many states have a law that require companies to have a par value for their shares.

Additional Paid-in Capital

Additional paid-in capital, also known as contributed surplus, is the value of the shares sold exceeding the par value. A company that sells shares for cash must record the transaction on the balance sheet by crediting the common stock and additional paid-in capital accounts by the same amount as the debit recorded in the cash account for the balance sheet to be accurate.

Example

Say company XYZ sells 1,000 shares to investors for $10 apiece. It receives $10,000 cash in exchange for those shares to spend building its business. If the company is incorporated in a state with laws concerning par value, it can record a par value of 10 cents per share. In this case, the accountants would debit the cash account for $10,000, credit the common stock account for $100 and the remaining $9,900 would be credited in the additional paid-in capital account.

Resources

• Accounting Coach; Paid-in Capital or Contributed Capital; Harold Averkamp