Stated Capital
Stated capital, often referred to in accounting and corporate finance, represents the par value (or stated value) of issued shares or the total amount of cash or other assets received by a corporation in exchange for its shares when there’s no par value assigned. It’s essentially the value of capital that the company declares as its initial capital investment.
Here’s a breakdown of stated capital:
- Par Value: This is a nominal value assigned to shares of stock. While the market value of shares can fluctuate based on supply and demand, par value remains constant and is typically set at a minimal amount. For instance, a company might issue shares with a par value of $0.01 each, even though they are sold to investors for a much higher price.
- No Par Value: Some stocks don’t have a par value. Instead, they might have a stated value which is, in essence, an arbitrary value assigned to the stock by the company’s board of directors. This is different from the market value or the price at which the stock might sell on the open market.
- Importance of Stated Capital: This represents the portion of shareholders’ equity that cannot be distributed as dividends. Therefore, by knowing the stated capital, shareholders and creditors can have an idea of the minimum equity base of the company. This can provide protection to creditors by ensuring that a certain amount of capital remains in the company.
- Difference from Paid-in Capital: While stated capital represents the nominal or stated value of shares, additional paid-in capital (or capital in excess of par value) represents the amount received from shareholders over and above the par or stated value of shares. For example, if a company sells shares with a par value of $0.01 for $10 each, the stated capital would be $0.01 per share, and the additional paid-in capital would be $9.99 per share.
- Accounting for Stated Capital: On a company’s balance sheet, the stated capital will typically be represented under the shareholders’ equity section as “common stock” or “preferred stock” (depending on the type of shares issued) at par or stated value. Additional amounts received over the par or stated value will be listed separately, often as “additional paid-in capital” or a similar term.
In essence, stated capital gives a foundational value for the equity that has been contributed by shareholders, acting as a protection for creditors by ensuring a base level of equity remains in the business. Different jurisdictions might have varying regulations about the use and calculation of stated capital, so it’s always good practice to refer to local corporate laws and accounting standards when assessing it.
Example of Stated Capital
Let’s explore the concept of stated capital with a fictional example.
Company: TechFusion Inc.
Scenario: TechFusion Inc. is a start-up that decides to raise capital by issuing shares to the public. They plan to issue 1 million shares to fund their operations and growth projects.
Details of the Share Issue:
- Par Value: TechFusion Inc. sets a par value of $0.50 for each share. This value is largely nominal and doesn’t necessarily reflect the true worth or the selling price of the shares.
- Issue Price: The shares are sold to investors at an issue price of $10 per share. This means investors are buying each share for $10, even though the par value is only $0.50.
Accounting for Stated Capital:
- Stated Capital (Par Value):
- 1 million shares x $0.50 (par value per share) = $500,000
- Additional Paid-in Capital:
- Amount received per share over the par value: $10 (issue price) – $0.50 (par value) = $9.50
- 1 million shares x $9.50 = $9,500,000
On TechFusion Inc.’s Balance Sheet:
- Shareholders’ Equity Section:
- Common Stock (Stated Capital): $500,000
- Additional Paid-in Capital: $9,500,000
The total capital received from the issue of shares would be $10,000,000 ($500,000 + $9,500,000). Here, the “Common Stock” entry (or Stated Capital) provides a base value of equity, and the “Additional Paid-in Capital” entry represents the excess amount investors paid over the par value.
This example simplifies the concept to help illustrate the distinction between the stated (or par) value of shares and the additional capital that a company might receive over and above that stated value. The total equity contribution from shareholders would be the combination of both these amounts.
