What is Additional Paid-In Capital?
Additional Paid-In Capital (APIC) refers to the amount of money that an investor pays above the par value of a stock issued by a company. When companies issue shares, they often set a par value, which is the nominal or face value of the stock. If investors pay more than this par value, the extra amount is recorded as additional paid-in capital. This term is also commonly referred to as “Capital Surplus” or “Share Premium.”
Key Points
- Par Value: The nominal value of a stock set by the issuing company.
- APIC: The additional amount paid by investors over the par value.
- Equity Component: APIC is a part of shareholders’ equity in the balance sheet.
Examples of Additional Paid-In Capital
- Initial Public Offering (IPO): During an IPO, if a company sets the par value of its shares at $1 but sells them to investors for $10 each, the $9 difference per share would be recorded as additional paid-in capital.
- Secondary Offering: In a secondary offering, if a company issues more shares at a price above the original par value, the excess amount received over the par value is added to APIC.
Frequently Asked Questions (FAQs)
What is the purpose of Additional Paid-In Capital?
APIC provides a buffer that can be used for business expansion, paying dividends, or absorbing losses without affecting the company’s reported capital.
How is Additional Paid-In Capital reported in financial statements?
APIC is usually found in the shareholders’ equity section of the balance sheet, beneath common and preferred stock entries.
Does Additional Paid-In Capital impact the stock’s market value?
No, APIC impacts a company’s balance sheet but does not directly affect the market value of the stock, which is influenced by market demand, company performance, and economic conditions.
Can Additional Paid-In Capital be withdrawn?
APIC is part of shareholders’ equity and, therefore, cannot be withdrawn like cash. It represents the funds contributed by shareholders in excess of par value.
What’s the difference between Additional Paid-In Capital and Retained Earnings?
APIC is the excess amount over par value paid by shareholders for shares, while retained earnings are the profits accumulated by the company over time that have not been distributed as dividends.
Related Terms
- Par Value: The face value of a stock or bond as stated by the issuing company.
- Retained Earnings: Profits retained in the company rather than distributed to shareholders as dividends.
- Shareholders’ Equity: The residual interest in the assets of a company after deducting its liabilities.
- Capital Surplus: Another term for additional paid-in capital, representing the amounts received from investors above the par value.
Online Resources
- Investopedia - Additional Paid-In Capital
- Financial Accounting Standards Board (FASB)
- U.S. Securities and Exchange Commission (SEC)
Suggested Books for Further Studies
- “Financial Accounting: An Introduction to Concepts, Methods and Uses” by Roman L. Weil, Katherine Schipper, and Jennifer Francis
- “Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield
- “Principles of Corporate Finance” by Richard A. Brealey, Stewart C. Myers, and Franklin Allen
Accounting Basics: “Additional Paid-In Capital” Fundamentals Quiz
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