# Additional Paid in Capital - Explained

What is Additional Paid in Capital?

# What is Additional Paid In Capital?

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. One can create this additional paid-in capital with issuing either common stock or preferred stock.

## How is Additional Paid In Capital Used?

Companies offer financial products including equity and debt to its investors. Similar to any other product, there are some associated costs for producing a product. A company earns profits on the sale of its product. Additional paid in capital can also be associated with profit earned on common stock. In other words, when a share is sold beyond the actual cost of the share, the book value of profit earned thereon is referred to as additional paid-in capital. It is the amount paid by investors exceeding the par value. One can find the par value, that is the actual share price, on the stock certificate. The concept of additional paid-in capital implies only to the transactions at initial public offering. Any transaction that takes place after IPO cannot add to the additional paid-in capital.

## Additional Paid in Capital Example

Suppose a company has issued 1 million shares, and the par value of each share is \$50. Investors pay \$20 as premium per share in addition to its par value, thereby paying \$70 per share. When a record of capital received from the issue is made, the amount of \$50 million is referred to as share capital or paid-in capital. And the additional amount of \$20 million, considered as additional paid-in capital, gets transferred to contributed surplus account. However, there can be a few companies who prefer separating additional paid-in capital and contributed surplus in financial statements.

## Par Value in Calculating Additional Paid in Capital

Par value refers to the price the share of stock has, is considered a random number. Same is the case with additional paid-in capital where companies somehow sell an intangible thing, allocate it some cost, and consider the difference as profit. A company decides on its par value at the time of issuing shares when there is no market. Generally, par value is ascertained at 1 cent for every share. As per state regulations, companies cannot sell their shares at a price below par value. There are some provinces that permit organizations to issue shares without par value.