Paid in Capital: Everything You Need to Know
Paid-in capital (PIC) is the amount of capital investors have "paid in" to a corporation by purchasing shares in exchange for equity.4 min read
What Is Paid-In Capital?
Paid-in capital (PIC) is the amount of capital investors have "paid in" to a corporation by purchasing shares in exchange for equity.
A paid-in capital account does not show the individual contributions of each investor, just the total amount provided by all investors.
The primary market is the part of the capital market that issues new securities. It is through the primary market that people invest in a corporation by purchasing stock, raising the corporation's PIC figure.
Stock purchased in the open market from other stockholders (secondary market) does not affect paid-in capital.
Additional Paid-In Capital
Paid-in capital can also refer to a balance sheet entry, often listed under stockholder's equity. Additional paid-in capital (APIC) is also known as capital surplus or share premium. These entries show the amount a corporation raised on shares over their face value.
For example, if 100 common stock shares at $1 face value are sold at a price of $2 per share, the additional paid-in capital is $200.
Most common shares today have small face values, usually just a few pennies. Thus, the APIC entry may be a better reflection of the total PIC figure.
Why Is Paid in Capital Important?
For common stock in most corporations, paid-in capital consists of the stock's face value added to the additional paid-in capital amount.
Paid-In Capital (Contributed Capital) = A + B
- A = Share capital/Capital stock (common stock plus preferred stock)
- B = Additional paid-in capital (paid-in capital in excess of par)
Before retained earnings start building up, a large part of a company's equity usually comes from APIC. This forms an important capital layer of defense against business losses.
Paid-in Capital From the Sale of Treasury Stock
Companies may buy back shares and return some capital to shareholders. These shares are listed as treasury stock and reduce the total balance of shareholders' equity.
One of three things happens when treasury stock is sold:
- If sold above its purchase cost, the gain is credited to shareholders' equity in an account called "paid-in capital from treasury stock."
- If sold below purchase cost, the loss reduces the company's retained earnings.
- If sold at its purchase cost, the shareholders' equity returns to how it was before treasury stock was purchased.
Paid-In Capital From the Retirement of Treasury Stock
Companies may also retire some treasury shares, which is another way to remove treasury stock rather than reissuing it. Retiring treasury stock reduces the PIC or APIC by the number of retired treasury shares.
Depending on how the purchase price of treasury stock compares to the paid-in capital of those shares, one of two things happens:
- Paid-in capital from the retirement of treasury stock is credited to the shareholder's equity section.
- Retained earnings are debited for additional loss of value in shareholder's equity.
The retirement of treasury stock reduces the PIC or the total par value and APIC.
How Does Paid-In Capital Work?
If a company wanted to raise $1,000,000 in order to fund a new factory, it could do so via paid-in capital. It would list 100,000 shares of new stock at $10 each in order to raise this amount.
The $1,000,000 will be listed among the company's assets along with the additional corresponding equity. However, the total figure will be broken up into two lines:
- The face value (or par value) of the stock
- Anything above the face value of the stock
The company will then choose its par value, which is usually something like $0.01 for each new share of stock. Anything over the par value is then recorded as additional paid-in capital.
Paid-In Capital Example
HoneySlam, Inc. wants to put common stock in the amount of 100,000 shares on the market at a par value of $2. The total value of the common stock is $200,000.
The investment bank is sure that HoneySlam will be able to draw an offer of $20 per share based on the current market value of the stock. However, HoneySlam isn't sure it can receive $20 per share, so it sells the common stock to the investment bank at $19 per share. This means that the investment bank can make the offer for $20 per share and HoneySlam can debit cash in the amount of $1.9 million.
HoneySlam can also credit common stock or paid-in capital for $200,000, and the additional $1.7 million will be credited as additional paid-in capital.
Frequently Asked Questions
- What is the difference between paid-in capital and retained earnings?
Retained earnings are the total amount of net income earned by a corporation (after tax) since its inception. This figure also leaves out the dividends that have been paid to stockholders since the business started.
Paid-in capital is the amount that the corporation has received from stockholders when issuing its stock.
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