Paid in capital definition
/What is Paid in Capital?
Paid in capital is the payments received from investors in exchange for an entity's stock. This is one of the key components of the total equity of a business. Paid in capital can involve either common stock or preferred stock. These funds only come from the sale of stock directly to investors by the issuer; it is not derived from the sale of stock on the secondary market between investors, nor from any operating activities.
Paid in capital is only comprised of funds received from the sale of stock; it does not include proceeds from ongoing company operations. The balance in paid in capital can be reduced if a corporation elects to buy back shares from its shareholders; this can be either a direct reduction of the account, or it may be listed in a contra equity account that is paired with and offsets the paid in capital account.
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The Interpretation of Financial Statements
Paid In Capital vs. Additional Paid In Capital
Paid in capital is somewhat different from the term additional paid-in capital, because paid in capital includes both the par value of stock sold and the additional paid-in capital representing the price at which stock is sold above the par value. Thus, the formula for paid in capital is:
Paid in capital = Par value + Additional paid in capital
An alternative meaning is that paid in capital equals additional paid in capital, so that par value is excluded from the definition. Thus, you need to be clear on the definition when discussing paid in capital with other people who may have a different concept of the term.
Accounting for Paid-In Capital
When stock is sold, the proceeds are divided into the par value of the shares sold (frequently $0.01 per share) and additional paid-in capital. This results in a debit to the cash account and credits to the common stock account and the additional paid in capital account. For example, a corporation sells 1,000 common shares with a par value of $0.01 per share, at the current market price of $20 per share. The total paid in capital is $20,000, of which $10 is recorded in the common stock account, and $19,990 is recorded in the additional paid in capital account.
Is Paid In Capital a Debit or Credit?
The natural balance of the accounts that comprise paid in capital is a credit. This means that any additions to the common stock, preferred stock, and/or additional paid in capital accounts would be recorded as credits. The repurchase of shares from shareholders would result in debits to these accounts, since the account balances are being reduced.
Presentation of Paid In Capital
Paid in capital appears in the equity section of a reporting entity’s balance sheet.
Terms Similar to Paid in Capital
Paid in capital is also known as contributed capital.