Paid-in Capital (Contributed Capital)

1. Definition

Paid-in Capital represents the total amount of cash or other assets that shareholders have given a company in exchange for stock.

It is distinguished from Retained Earnings because it comes from external funding (investors) rather than internal operations (profits).

2. Key Components

For accounting and legal purposes, the money received from investors is split into two categories:

A. Common Stock (Par Value)

• The nominal or face value of the stock as stated in the corporate charter.
• This represents the "Legal Capital" of the firm.

B. Additional Paid-in Capital (APIC)

• Also known as Capital in Excess of Par.
• This is the amount paid by investors above the par value of the stock. Since stocks are usually issued at a market price far higher than their par value, this account typically holds the bulk of the invested funds.

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3. Example

Suppose a company issues 1 share of stock with a par value of $1 but sells it to an investor for $10.

1. Common Stock: $1 is recorded here.
2. Additional Paid-in Capital: $9 ($10 - $1) is recorded here.
3. Total Paid-in Capital: $10 (Total cash received).

4. Why It Matters

• Financing Source: It shows how much capital the company has raised from the equity markets (IPO, secondary offerings) to fund its business.
• Shareholder Dilution: Increasing paid-in capital usually means issuing new shares, which dilutes the ownership percentage of existing shareholders.

5. Distinction from Retained Earnings

• Paid-in Capital: Funds contributed by owners.
• Retained Earnings: Funds earned by the business.