What Is Included in Paid In Capital?
Paid in capital, also commonly referred to as contributed capital, is part of the economics lexicon describing the cash contribution given to a company through the purchase of stock in that company via the primary market. It includes capital stock, stockholder contributions, and recapitalization surplus. Paid in capital is not inclusive of stock purchased in the secondary market.
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Capital Stock
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The capital stock element of paid in capital refers to the common stock utilized by companies to raise money. Common stock is customarily sold through public offerings to investors who hope to earn dividends or payments from their share of company profits over time. Unlike the case with preferred stock, stockholders cannot lose their original investment in common stock through capital transactions.
Contributions Above Par Capital
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Paid in capital is also inclusive of stock plus par value. This value of par stock is normally established by corporate charters and legislated by state and federal financial laws. Par value stock is comprised of the the funds paid to a corporation for common stock that exceeds its common stock's par value. Also referred to as stock premiums or premium on common stock, above par value is a facet of a stockholder's total contributed capital, which also includes preferred and common stock contributions.
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Legislation
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Corporations are required in nearly all states to report the par amount of shares individually and separately from profits received that are greater than the par amount. Many states also require a stated value of common stock when no par value exists. In states that do not mandate a par or stated value on transaction reports, proceeds are credited to the common stocks utilized in paid in capital.
Paid in Capital in Stockholders' Equity
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When combined with retained earnings and treasury stock, paid in capital comprises the entirety of a company's stockholders' equity. Retained earnings represent the net income a stockholder has acquired from his holding of stock that has not been paid out in dividends, while treasury stock represents common stock holdings. These earnings also include any accumulated deficits that result from negative stock performance or company retained earnings.
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