paid-in capital

paid-in capital
paid-in capital, or “contributed capital,” is the amount of shareholder’s equity that has been invested by shareholders and not earned by business operations. paid-in capital is typically broken down into two line items on the balance sheet: mon stock and additional paid-in capital.
definition and examples of paid-in capital
paid-in capital is the amount of money a pany has raised by issuing shares to investors. paid-in capital is calculated by adding balance-sheet line items mon stock, preferred stock, and additional paid-in capital.
mon stock and preferred stock are recorded at par value. par value is a nominal amount (usually one cent per share) assigned to each share of stock. the rest
of contributed capital is assigned to additional paid-in capital, w hich sometimes is called “capital surplus”. both of these line items are recorded at their original amounts and not changed as the market value of the stock changes.
paid-in capital and its counterpart, earned capital, tell the story of how much money has been contributed to a pany by investors and by operations.
•alternate name: contributed capital
as an example, here is target’s (tgt) oct. 31, 2021, balance sheet:
account value
mon stock$40,000,000
additional paid-in capital$6,381,000,000
sum: paid-in capital$6,421,000,000
target’s total paid-in capital of $6.42 billion is made up of only $40 million in mon stock, at par value, and $6.38 billion of additional paid-in capital shareholders have invested in the pany.
you can also back into the paid-in capital formula by subtracting retained earnings and other prehensive ine from the total shareholder’s equity balance. for target’s q3 2021 results, the formula would be:
$13.80 billion - ($8.07 billion - $687 million) =
$6.42 billion
how paid-in capital works
businesses raise paid-in capital with new issuances of mon and preferred stock. they can reduce it through treasury stock, which is when a pany buys back its own shares.
many states require that mon stock is first issued at par value when the pany is founded, but some states don’t require it. from there, all further issuances
of stock are added to the three paid-in capital accounts.
mon stock
mon stock is the stock that trades on the stock market. mon stock grants the owner voting rights and a right
to dividends (if issued). businesses typically list their mon stock on the market through an initial
public offering (ipo). once the stock has been listed, the pany may choose to generate more capital through a secondary public offering.
preferred stock
preferred stock is similar to mon stock, but also similar to fixed-ine instruments such as bonds. preferred stockholders get their dividends before mon stockholders do, and they get payment precedence if
the pany goes bankrupt. preferred stock typically has less capital appreciation upside than mon stock because it has no voting rights.
treasury stock
treasury stock is all the pany’s stock that the pany has reacquired. remember, mon and preferred stock are reported at their original amounts and only changed if there are new issuances. treasury stock is the contra asset account used to account for repurchases.
panies buy back stock for a variety of reasons, including boosting earnings per share, undervalued stock, and returning value to shareholders.
paid-in capital vs. earned capital
paid-in capital tells an analyst how much money has been invested in a business, and earned capital tells the analyst how much money has been generated by the pany’s operations and investments.
earned capital, or “retained earnings,” is the other half of shareholder’s equity. retained earnings are the sum total of all profit the pany has earned minus any dividends distributed to shareholders.
as a general rule of thumb, you want earned capital to be substantially more than paid-in capital by the time a pany is a stalwart stock. otherwise, the sum total of investment made in the pany will not have generated a satisfactory return. of course, if the pany has paid out a lot of dividends, this rule should be adjusted to account for that.
key takeaways
•paid-in capital is the sum of all dollars
invested into a pany.
•it is also referred to as “contributed
capital.”
•you can calculate paid-in capital by adding mon
and preferred stock with additional paid-in
capital or capital surplus on the balance sheet.
•paid-in capital can be reduced by treasury stock
when a business buys back shares.。