Additional Paid-In Capital vs. Contributed Capital

Additional paid-in capital is the amount of money shareholders pay above the par value of a stock, while the contributed capital is the sum of the par value and the APIC

Author: Austin Anderson
Austin Anderson
Austin Anderson
Consulting | Data Analysis

Austin has been working with Ernst & Young for over four years, starting as a senior consultant before being promoted to a manager. At EY, he focuses on strategy, process and operations improvement, and business transformation consulting services focused on health provider, payer, and public health organizations. Austin specializes in the health industry but supports clients across multiple industries.

Austin has a Bachelor of Science in Engineering and a Masters of Business Administration in Strategy, Management and Organization, both from the University of Michigan.

Reviewed By: Christopher Haynes
Christopher Haynes
Christopher Haynes
Asset Management | Investment Banking

Chris currently works as an investment associate with Ascension Ventures, a strategic healthcare venture fund that invests on behalf of thirteen of the nation's leading health systems with $88 billion in combined operating revenue. Previously, Chris served as an investment analyst with New Holland Capital, a hedge fund-of-funds asset management firm with $20 billion under management, and as an investment banking analyst in SunTrust Robinson Humphrey's Financial Sponsor Group.

Chris graduated Magna Cum Laude from the University of Florida with a Bachelor of Arts in Economics and earned a Master of Finance (MSF) from the Olin School of Business at Washington University in St. Louis.

Last Updated:September 16, 2023

What Is Additional Paid-In Capital vs. Contributed Capital?

Additional paid-in capital is the amount of money shareholders pay above the par value of a stock. The contributed capital is the sum of the par value and the APIC.

In a company's balance sheet, the shareholders' equity section will include the contribution of capital or contributed capital. However, this section is divided into additional paid-in capital and common stock.

It's important to understand these two items as they play a crucial role in the equity section of the balance sheet. 

Firstly let us understand what is equity, and why is it so important. Equity is equal to the difference between the assets and liabilities of the balance sheet. It is the sum of money invested by a company's owner. 

The company can use equity to finance its business. The advantage of this type of financing is that the firm will not be obliged to make monthly loan payments, which might be a game changer if the enterprise isn’t profitable initially.

Consequently, you're free to invest more money in your expanding company. On the other hand, if the company lacks creditworthiness, it cannot borrow money from financial institutions like banks and insurance companies. Equity financing can be the alternative.

Key takeaways

  • APIC is the amount shareholders pay for shares above the par value, primarily during initial public offerings (IPOs). It represents a profit potential for businesses and is categorized under shareholder equity on the balance sheet.
  • Contributed capital or paid-in capital is the total amount of money and assets shareholders provide to a company in exchange for stock. It represents the cost shareholders paid for their ownership in the business and includes both common stock and APIC.

What is Additional Paid-in Capital?

Additional paid-in capital is "contributed capital over par" when a firm is in the initial public offering (IPO) phase. APIC happens when an investor directly purchases freshly issued shares from the company. 

Since it results in businesses getting extra cash from stockholders, APIC, categorized under the shareholder equity (S.E.) portion of a balance sheet, is a profit potential for businesses.

Companies provide their investors with financial goods, such as stock and debt. Creating them has certain associated costs, just like any other product.

Profits are generated by a corporation when its product is sold. Gain on common stock can also be linked to additional paid-in capital. 

Otherwise stated, the book value of the profit made on a share when sold for more than its real cost is referred to as extra paid-in capital.

It is the amount that investors have paid over and above the par value. The stock certificate will list the par value or the actual share price. The idea of extra paid-in capital implies only the transactions during initial public offerings.

After the IPO, no transaction may increase the extra paid-in capital.

Example of additional paid-in capital

Let's say a business has issued 1 million shares, each of which has a $50 par value. Investors pay $70 for each share, which is $20 more than the share's par value. 

The $50 million is referred to as share capital or paid-in capital when a record of capital received from the Issuance is established. 

The extra $20 million, deemed as additional paid-in capital, is then deposited to the contributed surplus account.

However, some businesses could opt to separate contributed excess and additional paid-in capital in financial statements.

Formula: 

APIC = (Issue Price – Par Value) x Number of Shares Acquired by Investors

Imagine a private business recently went public through an IPO, issuing its shares at a selling price of $5 per share with a par value of $0.01.

  • Price at Issuance: $5.00 Par Value: $0.01
  • The issue price is $4.99 more than the declared par value.

$5.00 - $0.01 = $4.99 is the excess over the stated par value.

How would APIC be included on the balance sheet if there were 10 million outstanding common shares, as assumed?

The excess over the stated par value is multiplied by the quantity of outstanding common shares to get the extra paid-in capital (APIC) value, which equals $49.9 million.

APIC = $4.99 x 10,000,000 = $49.9 million

What is Par Value

Par value is the stock price determined in a corporation's charter. The purpose of the par value is to reassure potential investors that the issuing company wouldn't sell their shares for less than the par value.

In General, the law commands that stocks cannot be sold below par value. Therefore, companies set the par value as low as possible. 

Let’s imagine the par value of a stock is 0.05$. During a recession, the market is negatively affected, so if the stock price went from 1$ to 0.1$, investors would still be able to trade in this low range. 

Consequently, this is how most companies prevent problems concerning the stock's future sale price.

1. Par Value of a Preferred Stock 

The amount used to determine the related dividend for each share of preferred stock is its par value. If the par value of a preferred share is $50 and the dividend is 5%, the shareholders will receive an amount equivalent to 5% * 50 = $2.5 per share.

2. Par Value for Bonds

The par value of a bond is often fixed at $1,000 since that is the face value at which the issuing company will redeem the bond certificate on the maturity date. The business bases its calculation of the interest it owes investors on the par value. 

As a result, until a bond is redeemed, if the bond's stated interest rate is 10% and the par value is $1,000, the issuing company must pay $100 annually. 
Therefore, par value is crucial for calculating the maturity amount to return to investors and the interest rate to charge them.

Bonds frequently trade at values greater or lower than their face value on the open market. These variances are brought on by disparities in interest rates between the bond's declared interest rate and the market and shifts in the bond's credit rating

If the price surpasses the par value, the interest payment will still be based on the bond's par value.

What is Contributed Capital?

The amount of money and other assets that shareholders have provided to the organization in return for the stock is known as contributed capital, also known as paid-in capital.

Conversely, this is the cost shareholders incurred to acquire their ownership position in the business. Paid-in capital is another term for contributed capital. Contributed capital is an entry that shows how much stock has been acquired by shareholders on a company's balance sheet. 

Additionally, it shows the cost shareholders paid for ownership interest or position in the business. The value of a company's stock issued in return for money or other assets from shareholders is noted as contributed capital.

The contributed capital comprises proceeds from initial public offerings (IPOs), secondary offers, and direct public offerings.

Contributed capital covers the assets traded for equity and the money stockholders paid for their shares.

Contributed capital = Common Stock + Additional Paid-in Capital

Note

Capital contributions can be various. For example, loans are a form of contributed capital to the company. On the other hand, Non-current assets such as buildings and lands are also considered non-liquid capital contributions.

Example of contributed capital

Suppose the par value per share is 10$. Company A issued 1000 stocks. Consequently, with a price per share of 100$, the investors will have to pay 100000$ despite having a par value of 10$.

In this case, the company will record 10000$ of common stock accounts (10$ of par value times the number of shares). The difference between 100000$ and the common stock accounts will be recorded as paid-in capital (100000 - 10000 = 90000$).

We will sum both accounts 90000 + 10000 = 100000$ to get the contributed capital or the capital invested.

Additional Paid-In Capital Vs. Contributed Capital

In the following table, you can find what differentiates APIC from Contributed Capital: 

Difference between APIC and Contributed Capital
APIC Contributed Capital
APIC = (Issue Price – Par Value) x Number of Shares Acquired by Investors Contributed capital Formula = Common Stock + Additional Paid-in Capital
Is seen as a profit potential for businesses Shows how much stock has been acquired by shareholders on a company's balance sheet
Is the difference between contributed capital and par value Take into consideration the par value of stock
Is part of the equity in a balance sheet Is part of the equity in a balance sheet

Researched and authored by Elio Mehanna LinkedIn

Reviewed and edited by Parul GuptaLinkedIn

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