Definition: The amount of money that investors purchasing new shares from a company pay in excess of the par value of those shares.
Example: Upton Corporation is a company that is about to offer its shares to the public for the first time, which is its Initial Public Offering, or IPO. It will offer each share to the public for $10. It has previously declared that the par value of each share is $1. Therefore, $10 – $1, or $9 is the amount of additional paid-in capital the company will receive for each share it sells.
Investeach explains: The par value that is set by a company may have had a meaning back in the day, but today it is essentially meaningless. The company can set it at virtually any price. Still, some existing laws say that a company cannot sell its shares for less than par value. So, to be safe, a company about to issue shares can set the par value of each of its shares at a penny!
Additional Paid-In Capital is an accounting equity account. It is a companion account to the Common Stock account. That account is used to record how much par value per share was collected when the company sold its shares. Let’s say that Upton sells 10 million shares of stock to the public at the $10 price we stated earlier. The two accounts will have the following balances:
Common $1 million
Additional Paid-In Capital $9 million
Total $10 million
Notice that it doesn’t really matter into which equity account we record the amount received for the stock that was sold. The important thing is that enough investors thought highly enough of Upton and its future to collectively buy $10 million of its stock!
Riddle me this:
1. Why would a company set its par value per share very low?
2. What do we call the process where a company offers it shares to the public for the first time?
3. Into which bookkeeping account do we record the amount of money investors paid for their shares in excess of par value?