Additional paid-in capital / Contributed capital / Stated capital
Encyclopedia of Business Terms and Methods, ISBN 978-1-929500-10-9. Copyright © 2011. Marty J.Schmidt.
Additional paid in capital is one component of paid in capital (also called contributed capital) and is a balance sheet item, showing what has been invested by stockholders through purchase of stock from the corporation (not through purchase of stock on the open market from other stockholders). When investors buy shares directly from the company, that is, the company receives and keeps the funds as contributed capital (paid in capital). When shares are bought on the open market, of course, funds go to the investor selling them.
Contributed (paid in capital) capital is one of the two main categories on the balance sheet under owner’s equity (the other is retained earnings). Contributed capital, in turn, has two main components:
- Stated capital, which is usually defined as the stated, or par value of the shares of stock that have been isssued ( the stated capital is listed on the balance sheet below is the cum of values listed for as "Preferred stock" and "Common stock.").
- Additional paid-in capital, which represents money paid to the company above the par value.
Contributed Capital on the Balance Sheet
Contributed Capital and Stock Offerings
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Contributed Capital on the Balance Sheet
Contributed capital (paid in capital) entries on the balance sheet show up under Owner's Equity, as shown in the lower part of this example:
Grande Corporation Assets Liabilities Owners Equity Total Libabities and Equities..................... 22,075 |
Stated capital is the sum of the stock par values listed, "Preferred stock" and "Common stock."
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Contributed Capital and Stock Offerings
At a public stock offering, the difference between a stock's par value and the actual market price can be large. Par value for a stock is an accounting convention for the price intiially set by the company. The concept came into use as a way of letting caompanies announce publicly that they will sell no shares below a certain price (par), so as to assure investors that no one will receive more favorable prices.
At a company's IPO (Initial public offering), however, the market price can rise far above par, especially if the investing public has high expectations for company growth and company performance. The same difference may appear at the company's secondary, and subsequent stock offerings to the public. In brief, par value says little about the market's confidence in the company or potential future stock prices. What investors are willing to pay, in excess of par, however, is viewed as an indicator of fufture performance. For this indicator, they can look to the separate components of contributed capital on the balance sheet.
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