What Is Additional Paid-in Capital (APIC)?

Additional paid-in capital (APIC) is an accounting term referring to money an investor pays above and beyond the 澳洲幸运5官方开奖结果体彩网:par value price of a stock.

Often referred to as "contributed capital in excess of par,” APIC occurs when an investor buys newly-issued shares directly from a company during its 澳洲幸运5官方开奖结果体彩网:initial public offering (IPO) stage. APIC, which is itemized under the 澳洲幸运5官方开奖结果体彩网:shareholder equity (SE) section of a balance sheet, is viewed as a profit opportunity for companies as it res♛ults in them receiving excess cash from stockholders.

How Additional Paid-in Capital (APIC) Works

During its IPO, a firm is entitled to set any price for its stock that it sees fit. Meanwhile, 澳洲幸运5官方开奖结果体彩网:investors may elect to pay any amount above this declared par value of a share price, which generates the APIC. This APIC is also known as 澳洲幸运5官方开奖结果体彩网:contributed surplus.

Let us assume that during its IPO phase, the XYZ Widget Company issues one million shares of stock with a par value of $1 per share and that investors bid on shares for $2, $4, and $10 above the par value. Let us further assume that those shares ultimately sell for $11, consequently making the company $11 million. In this instance, the APIC is $10 million ($11 million minus the par value of $1 million). Therefore, the company’s 澳洲幸运5官方开奖结果体彩网:balance sheet itemizes🧸 $1 million as "paid-in capital" and $10 million as "additional pa🌺id-in capital."

Once a stock trades in the 澳洲幸运5官方开奖结果体彩网:secondary market, an investor may pay whatever the market will bear. When investors buy shares directly from a given company, that corporation receives and retains the funds as paid-in capital. But after that time, when investors buy shares in the 澳洲幸运5官方开奖结果体彩网:open market, ♌the generated fu🎃nds go directly into the pockets of the investors selling off their positions.

Special Considerations

APIC is generally booked in the SE section of the balance sheet. When a company issues stock, there are two entries that take place in the equity section: common stock and APIC. The total cash generated by the IPO is recorded as a debit a꧅nd the common stock and APIC are recorded as credits. Note that the cash recorded is reported in the asset section of the balance sheet, while common stock and APIC are reported in the equity section of the balance sheet.

澳洲幸运5官方开奖结果体彩网: The APIC formula is:

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

Par Value

Due to the fact that APIC represents money paid to the company above the par𝐆 value of a security, it is essential to undersꦍtand what par actually means. Simply put, “par” signifies the value a company assigns to stock at the time of its IPO, before there is even a market for the security. Issuers traditionally set stock par values deliberately low—in some cases as little as a penny per share—in order to preemptively avoid any potential legal liability, which might occur if the stock dips below its par value.

Market Value

Market value is the actual price a financial instrument is worth at any given time. The stock market determines the real value of a stock, which shifts continuously as shares 💙are bought and sold throughout the trading day. Thus, investors make money on the changing value of a stock over time, based on company performance and investor sentiment.ꦚ

Additional Paid-in Capital vs. Paid-in Capital

Paid-in capital, or 澳洲幸运5官方开奖结果体彩网:contributed capital, is the full amount of cash or other assets that shareholders have given a company in exchange for stock. Paid-in capital includes the par value of both common and 澳洲幸运5官方开奖结果体彩网:preferred stock plus any amount paid in excess.

Additional paid-in capital, as the name implies, includes only the amount paid in excess of the par value of stock issued during a company's IPO.

Both of these i🧸tems are included next to one another in the SE section of the balance sheet.

Benefits of Additional Paid-in Capital

For common stock, paid-in capital consists of a stock's par value and APIC, the latter of which may provide a substantial portion of a company's equity capital, before 澳洲幸运5官方开奖结果体彩网:retained earnings begin to accumul🅷ate. This capital provides a layer of defense against potential losses, in the event that retained earnings begin to🅠 show a deficit. 

Another huge advantage for a company issuing shares is that it does not raise the fixed cost of the company. The company doesn't have to make any payment to the investor; even 澳洲幸运5官方开奖结果体彩网:dividends are not required. Furthermore, investors do not have any claim on the company's existin﷽g assets.

After issuing stoc൲k to shareholders, the company is free to use the funds generated any way it chooses, whether that means paying off loans, purchasing an asset, or any other action that may ben❀efit the company.

The Bottom Line

Additional Paid-in Capital represents the amount of money investors contribute to a company above the stated par value of its stock. It is the equity portion of a company's balance sheet that includes funds received from issuing stock at a premium. This capital reflects the difference between the issue price of the shares and their par value, allowing companies to generate additional funds for expansion, research, or other business activities.

Correction—May 13, 2023: ꦏA previous version of this article incorrectly stated cash is recorded to the equity section of the balance sheet as opposed to the asset section.