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Additional Paid-In Capital: Definition, Formula & Example
Investments and stocks can be incredibly complicated.
When you’re valuing a stock, you want to always make sure that you can be as accurate as possible. This is what’s known as the par value of a stock. It’s the baseline of what the stock is worth. Anything that’s above that value is known as something different.
That’s where additional paid-in capital (APIC) comes into play.
But what exactly is APIC?
We’ll take a closer look at the definition, the formula used, and an example of additional paid-in capital.
Table of Contents
KEY TAKEAWAYS
- Additional Paid-In Capital is the calculated difference between the par value of common or preferred stock and the price paid for it.
- This is also known as contributed capital in excess of par, or capital surplus.
- APIC is usually put under shareholders’ equity on a business’s balance sheet.
- It is a great way to generate cash for businesses without first laying down any collateral.
What Is Additional Paid-In Capital?
Additional Paid-In Capital is the calculated difference between the par value of common or preferred stock and the price that is paid for it. It occurs when newly-issued shares are bought by an investor directly from a business. This would be during its initial public offering stage. APIC is usually put under shareholders’ equity on a business’s balance sheet. The sum of cash that is generated by the IPO is recorded as a debit. This is in the equity section of the balance sheet. The common stock and the APIC would be recorded as credits.
It is a great way to generate cash for businesses without first laying down any collateral.
What Is the APIC Formula?
The formula that can be used to calculate APIC is as follows:
What Is an Example of APIC?
Let’s say that Company X issues 20,000 of new stocks. These are valued at $5 per share. The par value of the stock is $0.01 and the company has 250,000 common shares outstanding.
With this information, we can calculate the APIC of the stock:
APIC = ($5 – $0.01) x 250,000
So:
APIC = $1,247,500
What Is Par Value?
APIC represents the amount of money that is paid to the company that is above the par value of the stock. So it’s important to fully understand what par value means.
The word ‘Par’ comes from Latin. It means equal or equality. In this case, it signifies the value that a business gives to a particular stock during its IPO. This is valued before there is a market for the stock.
If a stock drops below its par value, then potential legal liability may occur. This often leads to companies trying to avoid this by setting their stock par values far lower than their actual worth.
What Is Market Value?
So if the par value is the value set by the business before the stock hits the market, the market value is the value set by the open market.
The market value is the actual price a financial instrument is worth. This is because the stock market decides the real value of a stock. The paid-in capital includes the par value of both preferred and common stock. On top of any amount that is paid in excess of par value.
Summary
Additional paid-in capital is a very useful way for businesses to generate cash. Especially as they don’t have to first put down any capital. For investors, they can make a very good profit by purchasing shares at a company’s IPO.
FAQs on Additional Paid-In Capital
Is There a Difference Between Paid-in Capital and Additional Paid-in Capital?
Yes, there is a difference between paid-in capital vs additional paid-in capital. Paid-in capital is the amount of money or assets a company has received from shareholders to purchase stock. Additional paid-in capital is the amount a business receives for a stock purchase that is in excess of the stock’s par value.
How Do You Record Additional Paid-in Capital?
The sum of cash that is generated by the IPO is recorded as a debit. This is in the equity section of the balance sheet. The common stock and the APIC would be recorded as credits.
Does Additional Paid-in Capital Change?
There isn’t any change in the APIC when a company’s shares are first traded and on a secondary market. This is because the amounts that are exchanged during the second transaction don’t involve the company that first issued the shares.
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