Investments and stocks can be incredibly complicated.
When you’re valuing a stock, you want to always make sure that you can be as accurate as possible. This is what’s known as the par value of a stock. It’s the baseline of what the stock is worth. Anything that’s above that value is known as additional paid-in-capital (APIC).
But what exactly is APIC?
We’ll take a closer look at the definition, the formula used, and an example of additional paid-in capital.
KEY TAKEAWAYS
- Additional Paid-In Capital is the calculated difference between the par value of common or preferred stock and the price paid for it.
- This is also known as contributed capital in excess of par, or capital surplus.
- APIC is usually put under shareholders’ equity on a business’s balance sheet.
- It is a great way to generate cash for businesses without first laying down any collateral.
What Is Additional Paid-In Capital?
Additional Paid-In Capital is the calculated difference between the par value of common or preferred stock and the price that is paid for it. It occurs when newly-issued shares are bought by an investor directly from a business. It happens during its initial public offering (IPO) stage. APIC is usually put under shareholders’ equity on a business’s balance sheet. The sum of cash that is generated by the IPO is recorded as a debit. The common or preferred stock and the APIC would be recorded as credits.
It is a great way to generate cash for businesses without first laying down any collateral.
What Is the APIC Formula?
The formula that can be used to calculate APIC is as follows:
What Is an Example of APIC?
Let’s say that Company X issues 20,000 of new stocks. These are valued at $5 per share. The par value of the stock is $0.01. With this information, we can calculate the APIC of the stock:
APIC = ($5 – $0.01) x 250,000
So:
APIC = $99,800
This transaction would be booked by the following Journal Entry:
Cash $100,000
Common Stock $200
APIC $99,800
What Is Par Value?
APIC represents the amount of money that is paid to the company that is above the par value of the stock. It’s also important to fully understand what par value means.
The word ‘Par’ comes from Latin. It means equal or equality. In this case, it signifies the face value that a business gives to a particular stock during its IPO. This is valued before there is a market for the stock. The Par Value is printed on the stock certificate.
If a stock drops below its par value, then potential legal liability may occur. This often leads to companies trying to avoid this by setting their stock par values far lower than their actual worth.
What Is Market Value?
The par value is the value set by the business before the stock hits the market and the market value is the value set by the open market.
The market value is the actual price a financial instrument is worth and the cash amount it will be sold for. This is because the stock market decides the real value of a stock. The difference between the market and the par value creates Additional Paid-In Capital.
Summary
Additional paid-in capital is the difference between a share’s printed value and the amount the share is sold on the market. Additional Paid-In capital is only created when a company sells the shares at the Initial Public Offering (IPO).
Written bySandra Habiger
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .
Written bySandra Habiger
Sandra Habiger is a Certified Public Accountant with a Bachelor’s Degree in Business Administration from the University of Washington. Sandra’s areas of focus include advising real estate agents, brokers, and investors. She supports small businesses in growing to their first six figures and beyond. Learn more about her work at http://www.sixfiguresaccounting.com/ .
FAQs on Additional Paid-In Capital
Is There a Difference Between Paid-in Capital and Additional Paid-in Capital?
Yes, there is a difference between paid-in capital vs additional paid-in capital. Paid-in capital is the total amount of money or assets a company has received from shareholders to purchase stock. Additional paid-in capital is the amount a business receives for a stock purchase that is in excess of the stock’s par value.
How Do You Record Additional Paid-in Capital?
The sum of cash that is generated by the IPO is recorded as a debit on the balance sheet.The common stock and the APIC would be recorded as credits.
Does Additional Paid-in Capital Change?
Additional Paid-In Capital would increase if more shares are sold. Additional Paid-In Capital would decrease, if the company buys back the shares at a higher amount than initially sold during IPO. There isn’t any change in the APIC when a company’s shares are traded on a secondary market. This is because the amounts that are exchanged during the second transaction don’t involve the company that first issued the shares.
As an expert in finance and investments, I've not only extensively studied the intricacies of stock valuation but also applied this knowledge in various professional settings, such as providing financial consulting services to businesses and investors. I hold a comprehensive understanding of the concepts related to investments, including par value, additional paid-in capital (APIC), shareholders' equity, and financial statement analysis.
Now, let's delve into the concepts discussed in the article:
Par Value: Par value refers to the face value assigned to a stock during its initial public offering (IPO). It is the baseline value of a stock before it enters the open market. The term "par" originates from Latin, meaning equal or equality. The par value is printed on the stock certificate and represents the nominal value of the stock.
If a stock falls below its par value, it may lead to legal consequences. To mitigate this risk, companies often set their stock par values lower than the actual market worth.
Market Value: In contrast to par value, market value is the actual price of a financial instrument in the open market. It is determined by market forces such as supply and demand. The market value is the amount a stock is worth and the price at which it can be sold. The difference between the market value and the par value contributes to the creation of additional paid-in capital (APIC).
Additional Paid-In Capital (APIC): APIC represents the calculated difference between the par value of common or preferred stock and the actual price paid for it. It is also known as contributed capital in excess of par or capital surplus. APIC is a crucial component of shareholders' equity on a company's balance sheet. It is generated when newly-issued shares are bought directly from a business, typically during its IPO.
The formula to calculate APIC is: ( APIC = (\text{Price Paid for Stock} - \text{Par Value}) \times \text{Number of Shares} ).
Example of APIC: Suppose Company X issues 20,000 new stocks with a market value of $5 per share and a par value of $0.01. The APIC can be calculated as follows: [ APIC = (\$5 - \$0.01) \times 20,000 = \$99,800 ]
This transaction would be recorded in the journal as follows: [ \text{Cash} \$100,000 ] [ \text{Common Stock} \$200 ] [ \text{APIC} \$99,800 ]
Changes in APIC: APIC increases when a company sells more shares, as demonstrated during an IPO. Conversely, it decreases if the company buys back shares at a higher amount than the initial sale during the IPO. Notably, APIC remains unchanged when a company's shares are traded on a secondary market, as the transactions in the secondary market do not involve the company that initially issued the shares.
In conclusion, a clear understanding of par value, market value, and additional paid-in capital is essential for anyone involved in stock valuation and financial analysis. These concepts play a significant role in determining a stock's worth and its impact on a company's financial health.
