APIC (Additional Paid-In Capital)
Additional paid-in capital (APIC) is an account in the shareholder's equity portion of the balance sheet.
Updated:
June 14, 2023Additional paid-in capital (APIC) is an account in the shareholder's equity portion of the balance sheet. This account is created whenever a stock is sold for more than its par value. At the same time, the difference is recorded in the APIC account.
Whenever a corporation raises capital through its investors, it issues shares of stock in exchange for the investors' contributions. Often, the buyers purchase those issued shares from the company at a price higher than the predetermined par value.
This difference represents additional capital raised for the company and creates the different paid-in accounts in the shareholder's equity section of the balance sheet. However, the par value of the shares issued is recorded in a separate report. Therefore, it is usually called capital stock.
The total sum of money that the company gathers from its shareholders when it sells its stock is called paid-in capital. Therefore, it includes the par value of the shares sold and the extra cash paid over par.
The par value of the stocks sold usually represents a small portion of the total shareholder's equity. Other essential accounts in the shareholder's equity section include treasury stock and retained earnings.
APIC can be seen as a profit opportunity for a company because of the actual cash. However, it is not recorded as a profit for the organization. Instead, it represents a portion of the invested capital and is registered as an addition to the capital stock account.
As a simple example, the par value of all the stocks issued is $100,000. However, the purchase price was higher than the par value of a share, and the total capital collected from the investors was $150,000. It means that additional paid-in capital amounts to $50,000.
What is APIC (Additional Paid-In Capital)?
Shareholders' equity is an important section of the balance sheet. It is the amount of a company financed through shareholder investments such as common stock and preferred shares. It is made up of money invested in the company and retained earnings.
A company willing to increase this balance can do so in two different ways:
- Money from investors in exchange for shares of the company,
- Retaining additional profits, the company brings in a specific time frame.
APIC only has to do with the first option. It can only arise after a company has issued shares for its investors to purchase. Once a corporation sells shares to investors, those shares will be called outstanding shares.
Remark!
It includes the number of shares issued under corporate planning in the corporate charter (also known as articles of incorporation and articles of incorporation). Also, any issuance of shares must be accepted by local governors and the federal Securities and Exchange Commission.
Most of the time, companies require the assistance of underwriters. They ensure that the capital stock is being issued at the predetermined price and that the investment for the capital sold is available for the company on a particular date.
When a company sells capital stock to its investors, it must decide upon an initial price for selling those shares. That price is called the par value. However, most of the time, it plays an insignificant role because it will sell the 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) FAQ
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.
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