Paid In Capital Meaning Examples How To Calculate

Paid in Capital Meaning

Explanation

Paid in capital is the part of the subscribed share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company’s initial public offerings, common shares or preference stocks to the public. It appears as the owner’s or shareholders’ equity on the corporate balance sheet’s liability side.read more for which the consideration in cash or otherwise has been received. It is a part of Shareholders EquityShareholders EquityShareholder’s equity is the residual interest of the shareholders in the company and is calculated as the difference between Assets and Liabilities. The Shareholders’ Equity Statement on the balance sheet details the change in the value of shareholder’s equity from the beginning to the end of an accounting period.read more in the balance sheet, which shows the number of funds that the stockholders have invested through the purchase of stock in the company. The amount shown in the balance sheet is the aggregate amount invested by all the investors, not the particular investor.

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Paid in Capital Calculation = Common Stock + Additional Paid-in Capital (APIC)

As noted above, Starbucks’ common stock is $1.3 million, and APIC was $41.1 million in FY2018.

Therefore, Starbucks total Paid Capital = $42.4 million.

When the investor directly purchases the company shares, the company receives the fund as contributed capitalContributed CapitalContributed capital is the amount that shareholders have given to the company for buying their stake and is recorded in the books of accounts as the common stock and additional paid-in capital under the equity section of the company’s balance sheet.read more. When the buyers buy the shares from the open market, then the amount of shares is directly received by the investor selling them. Paid in share capital is not an income generated by the company through its day-to-day operations, but actually, it is a fund raised by the company through selling its equity shares.

Examples of Paid in Capital Calculation

Let’s take an example where a company named XYZ Ltd. Issues shares worth $20 million, having a face value of $20 per share. The company issues the shares at $30 per share, which shows that $10 is the premium on the issue of shares. Now the amount received is $600 million. It is bifurcated as

Common Stock = $400 million ($20 million *$20)Paid-in capital Calculation = $200 million ($20 million *10)Additional share capital can be shown as the contributed surplus or can be reported differently under the head shareholders’ equity.

Business activities that affect the amount Paid in the capital

source: Starbucks SEC Filings

#1 -Issuance of shares

At the time of incorporation of the company, promoters and investors purchase the shares. Firstly, the authorized share capital is fixed by the company beyond which the company cannot issue the shares in the market. The company fixes the par value or the face value of each share. So initially, the balance sheet issued, and paid-in capital is recorded at the par value. Afterward, let’s say a company wants to raise funds by issuing more share capital. I.e., funds are required for any capital expenditure or other large business transactionsBusiness TransactionsA business transaction is the exchange of goods or services for cash with third parties (such as customers, vendors, etc.). The goods involved have monetary and tangible economic value, which may be recorded and presented in the company’s financial statements.read more. Then, the company will issue more share capital, and the investors will pay up the amount. After the investor has paid the amount, a new journal entry will be passed by recording the increase in the paid-in capital of the company. Stock prices in 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 don’t affect the amount of paid-in calculation in the balance sheet.

#2 – Bonus Shares

A bonus issue means an issue of free additional shares to the company’s existing shareholders. Bonus shares can be issued out of free reserves, securities premium, or capital redemption reserve accounts. With the issuance of bonus shares, the amount in the paid-in capital is increased, and the free reserves are decreased. Although it doesn’t affect the total shareholders’ equity, it will individually affect the paid-in capital calculations and free reserves.

#3 – Buyback of shares

#4- The Retirement of treasury stock

The retirement of treasury stock is also an option for the company if it doesn’t want to reissue it. Due to the retirement of treasury stock, the whole balance applicable to the number of retired shares gets reduced. Or the balance from the paid-in capital calculation at par value and the balance in additional share capital gets reduced accordingly depending on the number of retired treasury shares.

#5 – Issuance of preferred shares

Sometimes management prefers to issue different classes of preferred sharesPreferred SharesA preferred share is a share that enjoys priority in receiving dividends compared to common stock. The dividend rate can be fixed or floating depending upon the terms of the issue. Also, preferred stockholders generally do not enjoy voting rights. However, their claims are discharged before the shares of common stockholders at the time of liquidation.read more instead of the common stock because of the expected negative reaction from the market by the company if it issues the share, as that issuance may lead to the dilution of the value of equity. It will increase the total balance as the issuance of the new preferred shares will increase the paid-in capital as excess value is recorded.