Additional Paid In Capital – Benefits and Example

What Is Additional Paid-In Capital (APIC)?

Additional paid in capital (APIC) refers to an investment in common stock above and beyond the par value price paid for shares of stock. Additional paid-in capital, or APIC, is the sum of money that a company raised in its initial public offering (IPO).

Since APICs represent profits for stockholders, they are kept on the balance sheet. They represent excess cash from stockholders, and companies usually distribute them as dividends.

How Additional Paid-In Capital Works?

When a company goes public, the initial public offering (IPO) occurs, and all outstanding shares are converted into stock (listed on an exchange). The IPO price equals the par value of the last issued share plus any cash payments received under the stock agreement. The increase in the price of the stock above the par value reflects the value of the additional paid-in capital received by the company due to the stock sale and any cash payments received by the company from exercising its options and buying back stock. An IPO is also commonly known as a stock offering or a pre-sale offering.

For example, if a stock price has been set at $10 and sold for $18, the investor received $8 worth of extra capital. Or, if the price was set at $10 and sold for $13, then the investor received $3 worth of additional capital.

When a stock floats in the second-hand market, investors can pay any price they want. But, when the initial investors buy shares directly from the company, that business gets to keep the funds. But, when investors sell their positions on the market, those generated funds don’t go into the pockets of those selling. For example, paid-in-capital applies if you invest in Ben & Jerry’s stock directly from the company. By purchasing shares in the secondary market, however, investors pay what the market will bear. After Ben & Jerry’s sells its stock in the open market, that cash goes directly into the hands of the sellers.

Special Considerations

Additional paid-in capital (APIC) is one of the balances in equity, which belong to a company’s stockholders. It is one of the accounts found on a balance sheet that reports both debt and assets of a firm. APIC is recorded when new equity is issued that does not fall strictly into the categories of additional paid-in capital from stock options or warrants, retained earnings, treasury stock, or statutory surplus.

When a corporation issues stock, two entries automatically take place in its equity section. First, the amount of cash generated from its issuance of shares is entered as a debit in the equity section. Next, two credits are made to the APIC. The first is the face value of the new stock being sold; this credit generates no income for the company because it is merely a recordkeeping device. The second entry is a contra-asset account recorded under the heading Additional Paid-In Capital.APIC can be calculated using the formula

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

Par-Value

A par value is a price that’s printed on the face of security. All publicly-traded companies have a par value, but most are assigned meager prices, such as a penny per share or less. The purpose of the par value is to protect investors from common risks. For example, if the stock loses value or becomes worthless, its par value acts as a floor that prevents people from losing their entire investment.

Market Value

The market value of a security is the price at which it is currently trading. This represents the true intrinsic value, based on demand and supply for that particular stock. When investors are bullish on a company, they will choose to buy its stock, causing its market value to rise.

Additional Paid-In Capital vs. Paid-In Capital

Paid-in capital is also known as contributed capital. It represents the amount that investors have given a company for stock. The paid-in capital includes both common and preferred stocks.

Additional Paid-In Capital (APIC) represents the excess of the par value of stock issued during a company’s Initial Public Offering (IPO.)

Both of these items are included in the owner’s equity section of the balance sheet.

Benefits of Additional Paid-In Capital

The primary intent of additional paid-in capital is to improve the business’s financial position when it is acquired. For example, an investor purchasing a controlling interest in a company might wish to use the capital to expand the business or improve certain operational aspects such as profitability or customer service. 

Other potential uses include enhancing a company’s retention prospects by increasing its value to existing customers or partners or extending its time to build market acceptance for the product or service.

When a company issues additional shares, it does not face any negative ramifications. The company’s fixed costs stay the same, and it does not have to put any cash into the deal. As an investor, you are not entitled to a share of the assets if the company dissolves.

The funds generated by the company issuing stock are considered “paid-in capital.” Once the board’s decision has been made to issue stock on the open market, those funds are free to be used in any way that benefits the company, whether through repaying outstanding loans or purchasing a new asset for future growth.

Is Additional Paid-In Capital an Asset?

Additional paid-in capital is recorded in the section of a balance sheet called equity. The total cash generated by the IPO is recorded as a debit in this section, and common stock and additional paid-in capital are recorded as credits.

How Does Paid-In Capital Increase?

If a company issues new preferred or common shares at a value higher than existing preferred or common shares, it will increase the paid-in capital.

How Does Paid-In Capital Decrease?

Paid-in capital can be reduced with share repurchases, cash dividends, and other ways.

Why does Additional Pay in the Capital matter?

Additional paid-in capital is the difference between the company’s net income and what it pays out in cash. In other words, it’s how much money the business has left over after paying off its debts and making good on its investment in you. That number is usually expressed as a percent, but there’s sometimes a half-percent or a quarter-percent floating around. Either way, it’s important to know because it tells you how much money somebody is willing to let you keep, either as a shareholder or as an employee.

Most investors want to know how much money is being put into a company. Your additional paid-in capital tells you how much capital you have used up in its creation and how much additional capital you may have available in the future if things work out differently.

Example of Additional Paid-In Capital

For example, if you have a $10,000 loan balance and pay $500 on time each month for 12 months, your additional paid-in capital for the year would be $1,500. If you have another $2,500 in the bank but fail to pay it off in 12 months, you would have a negative additional paid-in capital.

Key Takeaways

Additional paid in capital, or APIC, is the sum of money that a company raised in its initial public offering (IPO).
Additional paid-in capital (APIC) is one of the balances in equity, which belong to a company’s stockholders. It is one of the accounts found on a balance sheet that reports both debt and assets of a firm.
The primary intent of additional paid-in capital is to improve the business’s financial position when it is acquired.
Your additional paid-in capital tells you how much capital you have used up in its creation and how much additional capital you may have available in the future if things work out differently.