APIC (Additional Paid-In Capital)
Additional paid-in capital (APIC) is an account in the shareholder's equity portion of the balance sheet
What Is Additional Paid-in Capital (APIC)?
Additional Paid-In Capital (APIC) refers to an account in a company's shareholder equity section on the balance sheet. It comes into existence when a company sells its stock at a price higher than its predetermined par value. The difference between the sale price and the par value is recorded in the APIC account.
When a company needs to raise capital, it offers shares of stock to investors in exchange for their financial contributions. Typically, these shares are sold at a price exceeding the established par value. The surplus amount from this sale is documented in the APIC account.
This recorded difference in the APIC account represents additional capital acquired by the company. This, in turn, contributes to the various paid-in accounts within the shareholder's equity section of the balance sheet.
It's important to note that the par value of the issued shares is tracked separately and is often referred to as capital stock. The total funds accumulated by the company from selling its stock are collectively termed as paid-in capital. This encompasses both the par value of the shares and the extra amount paid above the par value.
Typically, the par value of the stocks sold constitutes only a fraction of the total shareholder's equity. Other key components within the shareholder's equity section include treasury stock and retained earnings.
From a company's perspective, APIC represents a potential source of profit due to the actual cash received. However, it's essential to understand that APIC is not treated as a profit for accounting purposes. Instead, it represents a portion of the invested capital and is registered as an addition to the capital stock account.
For example, consider a scenario where the par value of all issued stocks is $100,000. If the actual purchase price exceeds this par value, let's say totaling $150,000, the resulting Additional Paid-In Capital is $50,000. In this case, the Additional Paid-In Capital amounts to $50,000.
Key Takeaways
- APIC is a distinct account within a company's shareholder's equity on the balance sheet. It is generated when a company sells its stock for a price exceeding its par value.
- APIC represents additional invested capital, not immediate profit. It is added to the capital stock account and signifies funds raised beyond the par value of the shares.
- APIC and capital stock are recorded as separate entries in the shareholder's equity section. The total capital raised is divided between these two accounts, depending on whether the stock is sold at, above, or below par value.
- Par value, the minimum price for which shares are sold, is a legal benchmark and represents the minimum capital per share. However, it often plays a minor role as shares are typically sold above par value.
Understanding Additional Paid-In Capital (APIC)
Shareholders' equity is an important section of the balance sheet. This is essentially the portion of the company that's funded through investments made by shareholders, like buying common stock or preferred shares. It's a combination of the money initially invested in the company and any profits that the company has held onto over time.
A company willing to increase this balance can do so in two different ways:
- Getting Money from Investors in Exchange for Shares: This is where Additional Paid-In Capital (APIC) comes into play. APIC is relevant only when a company decides to issue new shares to investors. It represents the extra money the company receives from selling these shares compared to their nominal or par value.
- Keeping More Profits Over Time: The second way involves the company holding onto more of its profits over a specific period.
Let's focus on the first option and delve into how APIC works. APIC comes into existence when a company issues new shares for investors to buy. After the company sells these shares, they become outstanding shares. The number of shares issued is determined by the company's corporate charter, which outlines its structure and rules. Approvals from local authorities and federal bodies like the Securities and Exchange Commission are necessary for any share issuances.
Often, companies seek the help of underwriters to ensure that the shares are sold at the agreed-upon price and that the invested capital is available to the company on a specific date.
When a company decides to sell shares to investors, it needs to set a price for these shares. This initial price is called the par value. However, in practice, the par value is often less important because companies usually sell their shares for more than the par value.
What is Par Value?
The par value of a stock, also known as the stated value, is the lowest price for which will sell the shares to the public. It can be thought of as the minimum benchmark of capital stock that the company must have in its books to safeguard its creditors.
The par value marks the minimum amount of capital for each share being issued. That's why it is also known to represent the legal capital per share.
The par value of the shares must be shown separately in a company's balance sheet, although it usually takes on a small chunk of the shareholders' equity.
During a company's initial public offering, the company must decide the par value of the stocks sold in the primary market.
The par value determined depends upon multiple factors:
- The beginning of market capitalization the company aims to achieve.
- The number of public shares that will be issued and the original owners' portion of ownership.
- The forecast of stock prices after the initial selling in the market.
The par value of shares can be set at levels as low as one cent per share. That is why most of the time, it has almost no relevance in the stock market.
The price for which the stocks are initially sold is usually way above the par value. Hence, par value is not an indicator of the stock's market value.
In the books, it must be written that the par value of the total shares was outstanding under the "capital stock" account. The balance in that account equals the number of outstanding shares multiplied by the par value.
Any additional capital raised (because of the higher price for which the shares were sold) is written under the "additional paid-in capital" account.
Example of How Additional Paid-in Capital is Created
It is important to note that issuing stock does not create an asset. Instead, it allows the company to acquire assets like cash by selling corporation shares.
The following example shows how cash accumulation by selling shares is distributed between capital stock and additional paid-in capital.
Suppose a theoretical corporation sets the par value of their common stocks at 1$ per share of common stock. Before getting listed on a public exchange, the company plans to authorize the following:
- 600,000 of class A common stock
- Two hundred thousand of class B common stock
However, the company only issues 200,000 class A and 50,000 class B shares. It aims to sell the remaining later than its IPO (initial public offering). Therefore, theoretically, two alternate scenarios can occur:
The stocks were sold to the public at par value
Suppose 250,000 of the authorized shares of common stock were sold at par value. It means that they sold them for $1 per share. Remember that $1 per share is the lowest legal price the corporation claims can carry.
Although shares are rarely sold at par value, we will suppose that market participants have evaluated the stock to have a price of one dollar. It means that the par value of this stock is the same as its market value in the primary market.
Therefore, the company would raise: 250,000 * $1 = $250,000 in capital from its investors if it sells the shares for a dollar.
Since the price for which the shares were sold is no higher than their par value, there is no APIC recorded for the corporation.
APIC is only recorded if the price of the stock sold exceeds its par value, which is not the case here. Therefore, the total $250,000 of capital raised is recorded as capital stock, with no APIC.
The stocks were sold to the public above par value
Suppose that the 250,000 of the authorized shares of common stock were sold above par value. Specifically, it got sold for $4 per share of common stock.
Since the common stock is sold for more than $1, the company will raise more than $250,000 from its investors. It is almost always the case, as corporations sell their shares far above their par value (especially if the par value is deficient, like $1 per share or less).
Therefore, the company would raise: 250,000 * $4 = $1,000,000 in capital from its investors if it sells the shares for $4 per share. This figure represents paid-in capital.
Since the price for which the shares were sold is higher than their par value, the corporation will record additional paid-in capital in its books.
How much additional paid-in capital will the company record? APIC is recorded for the price of the shares over par value. Like the last case, the company records a capital stock of $250,000 (par value multiplied by the number of shares sold).
To calculate APIC, we can subtract the amount of capital stock from the total capital raised, also called paid-in capital. Hence, APIC will have a balance of: $1,000,000 - $250,000 = $750,000.
Another way of calculating APIC is by multiplying the number of shares sold by the difference between the market value of the claim ($4) and its par value ($1). Therefore, APIC will amount to: ($4 - $1) * 250,000 = $3 * 250,000 = $750,000.
APIC in Journal Entries in Accounting
Every company must record how much capital it raised from its stockholders on its balance sheet. Specifically, the money raised is recorded in the stockholders' equity section of the balance sheet.
As mentioned, the total capital raised is called paid-in capital. The paid-in capital is split between capital stock (the par value of the shares issued) and additional paid-in capital (the value of the shares issued over par).
Therefore, the balance sheet must record capital stock and APIC in separate accounts. When capital is raised, the balance of shareholders' equity increases. Therefore, credit always represents an increase in shareholders' equity in those accounts.
Using the same example, suppose a corporation has sold 250,000 shares of common stock. The par value of the common stock is $1.
Case 1: the stocks were sold to the public at par value
If the company sells common stock at par value, it will only raise 250,000 in capital stock with no APIC. Supposing the investment raised was in cash, cash increased by $250,000, and the capital stock increased by $250,000.
The journal entry will be as follows:
| Debit | Credit | |
|---|---|---|
| Cash | $250,000 | - |
| Capital Stock | - | $250,000 |
| Issued 250,000 shares of $1 par value stock at par value. | ||
The total capital raised is recorded in the capital stock account.
After raising the capital, the shareholders' equity section of the balance will appear as follows (we will assume retained earnings to be $50,000):
| Stockholders’ Equity | |
|---|---|
| Capital stock: $1 par value; authorized, 250,000 shares; issued and outstanding, 250,000 shares | 250,000 |
| Additional paid-in capital | 0 |
| Total paid-in capital | $250,000 |
| Retained Earnings | 50,000 |
| Total stockholders’ equity | $300,000 |
Case 2: the stocks were sold to the public above par value
Selling the 250,000 shares for $4 raises 1,000,000 for the company. That sum will be split between
- Capital stock ($250,000),
- Additional paid-in capital ($750,000).
Therefore, cash increases by $1,000,000, capital stock increases by $250,000, and APIC increases by $750,000. Total stockholders’ equity increases by $1,000,000.
The journal entry will be as follows:
| Debit | Credit | |
|---|---|---|
| Cash | $1,000,000 | - |
| Capital Stock | - | $250,000 |
| Additional Paid-in Capital | - | $750,000 |
| Issued 250,000 shares of $1 par value stock at $4 a share. | ||
In this case, the company records APIC in its books. APIC does not imply that the company has made a profit. It is simply part of the total investment raised by the company. APIC is combined with capital stock to represent total stockholders' equity.
After raising the capital, the shareholders' equity section of the balance will appear as follows (assuming retained earnings amount to $50,000):
| Stockholders’ Equity | |
|---|---|
| Capital stock: $1 par value; authorized, 250,000 shares; issued and outstanding, 250,000 shares | 250,000 |
| Additional paid-in capital | 750,000 |
| Total paid-in capital | $1,000,000 |
| Retained Earnings | 50,000 |
| Total stockholders’ equity | $1,050,000 |
APIC (Additional Paid-In Capital) FAQs
Paid-in capital is the total amount of investments a corporation raises by selling shares. Meanwhile, APIC represents a portion of paid-in capital. Specifically, APIC is the value of the shares outstanding that exceed their par value.
The par value per share may be higher than its price. In that case, the capital stock will be created as usual, but a new account will also be designed to offset the total paid-in capital. The new account, called “discount on capital stock,” will be credited to offset the total amount of investment raised.
Yes. Some states in the US permit companies to authorize their shares without a predetermined par value. In that case, the total paid-in capital will be recorded as capital stock. Not having a par value can help corporations sidestep the risk of their stock plummeting, causing them huge liabilities.
Researched and Authored by Vatche Tchelderian | LinkedIn
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