The additional paid-in capital account is reported on the balance sheet at the

Additional Paid-in capital, also known as Capital surplus, is the excess amount the company receives over and above the par value of shares (equity or preferred) from the investors during the time of an IPO; it can be seen as the profit which a company receives when it issues the stock for the first time in the open market.

The Par value of a stockPar Value Of A StockPar value of shares is the minimum share value determined by the company issuing such shares to the public. Companies will not sell such shares to the public for less than the decided value.read more is the minimum amount that must be paid to own a share. It means that to acquire a share, this base amount has to be paid.

  • For example, if a share is issued at $50 per share and its par value is $5 per share, we will conclude that $5 per share is the minimum amount that must be paid to acquire the share. This base amount is also called the legal capitalLegal CapitalLegal capital is defined as a portion of a firm's equity that is not permitted to leave the business. It is an amount that cannot be distributed to shareholders as a dividend or in any other way.read more of the company.
  • Here the APIC comes in. Since each company investor pays the whole amount (i.e., the issue price) to acquire one share, anything above par value is APIC.
  • Therefore, Additional Paid-in Capital Formula = (Issue Price – Par Value) x number of shares issued.
  • If 100 shares are issued, then, APIC = ($50 – $5) x 100 = $4,500

There’s another thing you need to consider while calculating additional paid-in capital. If the shares are purchased directly from the company (during IPO or FPO, etc.), there would be APIC above par value. However, if the shares are purchased from the secondary marketSecondary MarketA secondary market is a platform where investors can easily buy or sell securities once issued by the original issuer, be it a bank, corporation, or government entity. Also referred to as an aftermarket, it allows investors to trade securities freely without interference from those who issue them.read more, it would not affect the company’s APIC.

Also, have a look at this detailed guide on Share Capital.

Table of contents
  • What is Additional Paid-in Capital?
    • Additional Paid-in Capital Example
    • Additional paid-in capital Accounting Entries
    • Examples
    • Reasons for Changes in Additional paid-in Capital on Balance Sheet
    • Conclusion
    • Additional Paid-in Capital on Balance Sheet Video
    • Recommended Articles

The additional paid-in capital account is reported on the balance sheet at the

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Additional Paid-in Capital Example

Let’s take an example to understand APIC on the balance sheet better.

Let’s say that Company Infinite Inc. has issued equity shares of 10,000 at $50 per share. The par value of each share is $1 per share. Find out the APIC.

This is an easy-to-understand example illustrating how to approach additional paid-in capital on the balance sheet.

The additional paid-in capital account is reported on the balance sheet at the

Infinite Inc. has issued 10,000 equity shares at $50. That means the total equity capital would be = (10,000 * $10) = $500,000.

  • The catch is par value per share is just $1. That means we must attribute the corresponding amount to par value (stock). Here the par value would be = (10,000 * 1) = $10,000.
  • And the rest would be additional paid-in capital on the balance sheet as it is over and above the par value. That means the APIC formula = ($50 – $1)/share = $49 per share. Then, the total APIC would be = (10,000 * $49) = $490,000.

Additional paid-in capital Accounting Entries

How would we pass the accounting entry?

First, we need to think about the legal capitalLegal CapitalLegal capital is defined as a portion of a firm's equity that is not permitted to leave the business. It is an amount that cannot be distributed to shareholders as a dividend or in any other way.read more, i.e., par value (stock) amount. Since that’s the legal capital, we will attribute the amount to the common stock account. Then, the remaining amount (issue price – par value per share) would be attributed to APIC.

So, the entry would be –

  • The cash account would be debited since cash is an asset, and the company’s asset cash is increasing by receiving the whole amount (total equity capital).
  • We would credit the common stock accountStock AccountStock accounting is the process of recording the transactions entered into by a business enterprise beginning with investments made by anyone, whether a corporation or an individual, in the company in exchange for the issuance of something that can be easily traded in the open market.read more and APIC accounts in their respective proportions.

Examples

Let’s say that Company Eight Nest Ltd. has the following information.

Eight Nest Ltd. has issued 10,000 shares at $50 per share. However, they’ve kept the par value (stock) at $5 per share. So we need to pass the accounting entryAccounting EntryAccounting Entry is a summary of all the business transactions in the accounting books, including the debit & credit entry. It has 3 major types, i.e., Transaction Entry, Adjusting Entry, & Closing Entry. read more for additional paid-in capital on the balance sheet.

  • Here, we know that the issued number of equity shares is 10,000, and the issue price per share is $50. That means the total equity capital is = (10,000 * $50) = $500,000.
  • The par value is also mentioned i.e. $5 per share. That means, the total amount of par value is = (10,000 * $5) = $50,000.
  • The rest would be attributed to APIC. The total APIC would be = [10,000 * ($50 – $5)] = [10,000 * $45] = $450,000.

Now, we will pass the accounting entry –

The additional paid-in capital account is reported on the balance sheet at the

Reasons for Changes in Additional paid-in Capital on Balance Sheet

Please see below the snapshot. We note that APIC has been changing each year.

The additional paid-in capital account is reported on the balance sheet at the

We note that the changes in the APIC of Colgate are due to three reasons.

  • Share-based compensation expense of $127 million
  • Shares issued for stock options of $197 million
  • Share issued for restricted stock awards

Share-based compensation expenseShare-based Compensation ExpenseStock-based compensation also called share-based compensation refers to the rewards given by the company to its employees by way of giving them the equity ownership rights in the company with the motive of aligning the interest of the management, shareholders and the employees of the company.read more is reported in the income statement. This lowers the net incomeNet IncomeNet income for individuals and businesses refers to the amount of money left after subtracting direct and indirect expenses, taxes, and other deductions from their gross income. The income statement typically mentions it as the last line item, reflecting the profits made by an entity.read more, thereby reducing the shareholder’s equity through the retained earnings sectionRetained Earnings SectionRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company.read more. The contra entry for this is by increasing the additional paid-up capital.

The additional paid-in capital account is reported on the balance sheet at the

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Conclusion

Additional paid-in capital on the Balance Sheet has nothing to do with the market priceMarket PriceMarket price refers to the current price prevailing in the market at which goods, services, or assets are purchased or sold. The price point at which the supply of a commodity matches its demand in the market becomes its market price.read more per share. It is entirely dependent on the issue price. If an investor purchases shares from the company and sells them off to another investor at a higher price, it would not affect the company’s capital.

Additional Paid-in Capital on Balance Sheet Video

This has been a guide to Additional Paid-in capital on the Balance Sheet? Here we discuss its examples, formula, accounting entries, and reasons for changes over the years. You may also go through the following recommended posts on basic accounting –

Where is additional paid in capital on balance sheet?

APIC is recorded under the equity section of a company's balance sheet. It is recorded as a credit under shareholders' equity and refers to the money an investor pays above the par value price of a stock.

What does additional paid in capital mean on a balance sheet?

Additional paid-in capital refers to the additional amount that an investor pays beyond the par-value of a stock issued. In a balance sheet, this excessive amount is considered a part of contributed surplus account under shareholders equity.

Is additional paid in capital on the income statement?

Note that additional-paid-in-capital is not traced on the income statement. Define Additional-Paid-In-Capital: APIC stock means the additional funds paid for a company's shares over the par value.