Definition
The financial accounting term additional paid-in capital refers to the amount paid in excess of par value by investors when capital stock is first issued. There are a number of subsequent transactions that can also affect the balance of this account. Additional paid-in capital appears in the owner's equity section of the company's balance sheet.
Calculation
Additional Paid-in Capital = Price Paid for Capital Stock - Par Value of Capital Stock
Explanation
Companies will issue capital stock to raise funds used to expand business operations and create additional shareholder value. When companies first issue capital stock, the price paid in excess of the security's par value is classified as additional paid-in capital in the owner's equity section of the balance sheet. For example, if a company issues 1,000,000 shares of capital stock with a par value of $1.00 and the price paid by investors is $25.00, then the journal entry for this transaction would be:
Debit | Credit | |
Cash | $25,000,000 | |
Common Stock: 1,000,000 shares, par value $1.00 | $1,000,000 | |
Additional Paid-in Capital | $24,000,000 |
Note: Additional Paid-in Capital is sometimes used interchangeably with Paid-in Capital in Excess of Par.
There are a number of transactions that affect the balance of additional paid-in capital. For example, debits to this account result from transactions involving:
Capital stock issued at a discount
Liquidating dividends
Treasury stock sold below cost
While credits to this account result from transactions that include:
Capital stock issued at a premium
Conversion of preferred stock or convertible bonds
Special stockholder assessments
Treasury stock sold above cost
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorJanuary 8th, 2024- The financial accounting term owner's equity is used to describe the resources that are owned by the common and preferred stock shareholders of a company. Owner's equity is reported on a company's balance sheet.Moneyzine EditorSeptember 20th, 2023
The term capital stock is used to describe the authorized and issued transferable units of ownership in a corporation. Capital stock can include both common as well as preferred securities. The value of all capital stock issued can be found on the company's balance sheet.Moneyzine EditorJanuary 10th, 2024- The financial accounting term preferred stock refers to a class of equities issued by corporations that contains special preferences, or features, that are not present in common stock. Preferred stock dividends are typically paid before those of common stocks; however, they usually don't have the voting rights common shareholders enjoy.Moneyzine EditorSeptember 21st, 2023
- The financial accounting term par value is used to describe the stated, or printed, value of a security. Par values can be assigned to bonds as well as common and preferred stocks.Moneyzine EditorSeptember 20th, 2023
