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Additional Paid-In Capital Prior to engaging in operations, a firm can raise money in one of two ways:
- Receiving a loan from a bank, promising to pay a fixed amount at some future date. This is considered a Liability and would show up on the Balance Sheet in the Liabilities section, either Current or Non-Current depending on the payment schedule.
- Receiving cash from shareholders. Any amount raised by issuing stock to
shareholders is considered Contributed Capital. This Contributed Capital is broken down on the Balance Sheet into two categories1:
o Common Stock at Par Value o Additional Paid-In Capital
The Par Value of a stock is an amount that is assigned by the firm’s charter. It has very little meaning now – it’s simply an amount that is ascribed to each share of stock. The par value of stock has no relation to the market value of that stock (the amount of cash that someone would pay for a share of stock). Unfortunately, though, accounting does treat Par Value as if it’s something meaningful. When a firm raises cash by issuing shares, regardless of how much cash is raised, it separates the amount of cash into two components:
- Common Stock at Par Value: Simply equal to the number of shares sold multiplied by the Par Value
- Additional Paid-In Capital: The total cash raised, minus the Common Stock at Par Value
Again, the sum of these two accounts is considered “Contributed Capital” and the distinction between the two accounts is close to meaningless. Imagine a firm that issues 1,000 shares of stock for $100,000. That is, investors have given the firm $100 in cash for each share of stock. The journal entry (and thus the amounts on the Balance Sheet) would depend on the Par Value of the stock:
1 There could actually be more than two categories if the firm has many classes of shares. For example, a firm could have Class A and Class B shares, or Common Shares and Preferred Shares. In this example, I’m just assuming the firm has one share of stock outstanding.
Hyp
othe
tica
l Par
Val
ue:
P
ar =
$0.
01
Par
= $
25.0
0 Jo
urna
l Ent
ry
Dr.
Cas
h
$
100,
000
C
r. C
omm
on S
tock
at P
ar
$
10
C
r. A
ddit
iona
l Pai
d-In
Cap
ital
$
99,9
90
Dr.
Cas
h
$
100,
000
C
r. C
omm
on S
tock
at P
ar
$2
5,00
0
Cr.
Add
itio
nal P
aid-
In C
apit
al
$75
,000
H
ypot
heti
cal P
ar V
alue
:
Par
= $
0 (N
o P
ar V
alue
Sto
ck)
Par
= $
100.
00
Jour
nal E
ntry
D
r. C
ash
$10
0,00
0
Cr.
Con
trib
uted
Cap
ital
$1
00,0
00
-OR
- D
r. C
ash
$10
0,00
0
Cr.
Com
mon
Sto
ck
$10
0,00
0
Dr.
Cas
h
$
100,
000
C
r. C
omm
on S
tock
at P
ar
$10
0,00
0
In e
ach
case
, the
tota
l cas
h ra
ised
is th
e sa
me
– yo
u ca
n’t c
hang
e th
e fa
ct th
at th
e fi
rm a
ctua
lly
rece
ived
$10
0,00
0 in
tota
l cas
h fr
om
issu
ing
shar
es o
f st
ock.
Als
o in
eac
h ca
se, t
he to
tal C
ontr
ibut
ed C
apit
al (
Com
mon
Sto
ck a
t Par
+ A
ddit
iona
l Pai
d-In
Cap
ital
) is
the
sam
e –
in e
ach
case
the
firm
has
rec
eive
d $1
00,0
00.
The
onl
y di
ffer
ence
in th
ese
four
cas
es is
the
allo
cati
on b
etw
een
the
two
Con
trib
uted
Cap
ital
acc
ount
s:
- In
the
firs
t cas
e, w
ith
a Pa
r V
alue
of
$0.0
1/sh
are,
the
Com
mon
Sto
ck a
t Par
is in
crea
sed
by 1
,000
*$0.
01 =
$10
.
- In
the
seco
nd c
ase,
wit
h a
Par
Val
ue o
f $2
5/sh
are,
the
Com
mon
Sto
ck a
t Par
is in
crea
sed
by 1
,000
*$25
= $
25,0
00.
-
In th
e th
ird
case
, wit
h no
sta
ted
Par
Val
ue, t
here
are
no
long
er th
e tw
o se
para
te a
ccou
nts
and
the
tota
l am
ount
of
cash
rai
sed
is
cred
ited
to C
omm
on S
tock
or
Con
trib
uted
Cap
ital
. -
In th
e fo
urth
cas
e, th
e am
ount
of
cash
rec
eive
d pe
r sh
are
happ
ens
to b
e th
e sa
me
as th
e P
ar V
alue
and
the
Com
mon
Sto
ck a
t P
ar is
incr
ease
d by
1,0
00*$
100
= $
100,
000.
In a
ll c
ases
, Ad
dit
ion
al P
aid
-In
Cap
ital
is in
crea
sed
by
the
dif
fere
nce
bet
wee
n t
he
cash
rec
eive
d a
nd
th
e P
ar V
alu
e of
sto
ck
issu
ed.
