Additional Paid-In Capital
Additional Paid-In Capital (APIC), also known as capital surplus or share premium, is an accounting term used to describe the amount of money a company receives from investors when they purchase the company’s shares above their par value or nominal value. It represents the excess amount paid by investors over the stated value of the shares during the issuance of new stock.
When a company issues new shares, it records the par value of those shares in its common stock or preferred stock account, depending on the type of shares issued. The amount paid by investors that is above the par value is recorded as additional paid-in capital in the company’s balance sheet under the equity section. This additional capital provides the company with funds that can be used for various purposes, such as business expansion, reducing debt, or funding new projects.
Example of an Additional Paid-In Capital
Let’s assume that XYZ Company decides to issue new shares to raise capital for business expansion. They decide to issue 5,000 shares with a par value of $5 per share. During the issuance, investors show significant interest in the company’s shares and are willing to pay $25 per share.
Here’s the breakdown of how the transaction will be recorded:
- Par value of shares issued: 5,000 shares x $5 = $25,000
- Total amount received from investors: 5,000 shares x $25 = $125,000
- Additional paid-in capital: Total amount received – Par value of shares issued = $125,000 – $25,000 = $100,000
In this example, XYZ Company would record $25,000 in the common stock account for the par value of the shares issued and $100,000 in the additional paid-in capital account for the excess amount received from investors over the par value. This additional capital can be used by XYZ Company for purposes like business expansion, funding new projects, or reducing debt.