See Also:
Common Stock Definition
Preferred Stocks (Preferred Share)
Treasury Stock (Repurchased Shares)
Owner’s Equity
Balance Sheet

Paid in Capital Definition

The paid in capital definition is the total amount paid on equity or stock over the par value of the stock. In addition, it is a balance sheet account in the stockholder’s equity section. This account simply represents the market value over the book value of the equity. It is also called the premium stock, premium on stock, or additional paid in capital (APIC).

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Paid in Capital Equation

The following paid in capital equation is simply put as the amount paid for the stock over the par value of the stock:

Amount Paid Common Stock – Par Value Common Stock = Additional Paid in Capital

Usually the amount paid for the stock is at the market value so the following formula can also be looked at:

Market Value Stock – Book (par) Value Stock = Additional Paid in Capital

Paid in Capital Example

For example, Yazoo inc. is looking to make a public offering in the market for $2 par value common stock in the amount of 100,000 shares. Thus, the book value of the common stock is $200,000. The investment bank believes that the company will be able to receive a price based on its current market value of stock at $20 per share. Yazoo is unsure that they can receive this price. So, they opt to sell the stock at $19 per share first to the investment bank allowing them to make the offering. They can now debit cash in the amount of $1.9 million. Yazoo will also credit common stock for $200,000 or the book value, and it will also credit the additional paid in capital (APIC) account for the remainder of $1.7 million.
[box]Note: If successful in supplying the market with the stock, then the investment bank will make a profit of $1 million dollars that Yazoo would not see. However, many companies perform this same maneuver to take the volatility of the market out of the equation allowing Yazoo to lock in a price for the financing that they will receive. This is where the term underwriting comes from when referring to investment banking. [/box]
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