Paid-In Capital

Paid-In Capital Explained

Paid-In Capital, also known as Contributed Capital, is an important component of stockholders’ equity that appears on a company’s balance sheet. It represents the total amount of funds that shareholders have invested in the company via the purchase of company stock. This amount includes:

• Stocks Issued: The value of stocks that the company has issued.
• Premiums or Discounts: Any additional funds received (premiums) or losses incurred (discounts) from selling the stock above or below its par value.
• Stock Received from Donations: The value of stocks received by the company as donations.
• Resale of Treasury Stock: Proceeds from selling shares that the company previously bought back.

Examples of Paid-In Capital

1. Issuing Stock Above Par Value: If a company issues 1,000 shares with a par value of $1 each at a premium price of $10 per share, the paid-in capital above par value is $9,000 (($10 - $1) × 1,000 shares).

2. Donated Stock: Suppose a shareholder donates stocks worth $5,000 to the company; this amount will be added to paid-in capital.

3. Reselling Treasury Stock: If the company buys back 500 shares for $20 each and later resells them at $25 each, the extra $5 per share above the repurchase price ($2,500 in this case) is added to paid-in capital.

Frequently Asked Questions (FAQs)

Q1: How is Paid-In Capital different from Earned Capital?

• A1: Paid-In Capital is the amount received from shareholders for stock, while Earned Capital refers to the company’s retained earnings: profits saved and reinvested into the business over time.

Q2: Can paid-in capital decrease?

• A2: Paid-in capital generally does not decrease as it represents the original investment by shareholders. However, the overall stockholders’ equity can change over time.

Q3: What is the effect of treasury stock on paid-in capital?

• A3: When a company buys back its own shares (treasury stock), it does not affect paid-in capital but reduces the overall stockholders’ equity. Reselling the treasury stock can increase paid-in capital if sold at a profit.

Q4: What are common stock and additional paid-in capital?

• A4: Common stock represents the par value of issued shares, while additional paid-in capital is the amount received over and above the par value.

Q5: How do stock splits affect paid-in capital?

• A5: Stock splits do not impact the total paid-in capital; they only change the number and par value of shares without altering the overall financial value.

Related Terms with Definitions

• Retained Earnings: Profits that a company has kept to reinvest in the business, rather than paying them out as dividends.
• Treasury Stock: Stock that a company has repurchased from shareholders but not yet canceled or reissued.
• Par Value: The nominal or face value of a stock as stated in the corporate charter.
• Common Stock: Equity ownership in a company, giving holders voting rights and a share of profits.
• Preferred Stock: A class of stock with fixed dividends and priority over common stock in asset liquidation.

Online References

• Investopedia - Paid-In Capital
• AccountingTools - Paid-In Capital
• The Balance - Stockholders’ Equity

Suggested Books for Further Studies

• Intermediate Accounting by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
• Financial Accounting by Robert Libby, Patricia Libby, and Frank Hodge
• Principles of Accounting by Jerry J. Weygandt, Paul D. Kimmel, and Donald E. Kieso

Accounting Basics: “Paid-In Capital” Fundamentals Quiz

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