Do You Know What is Paid-in Capital?

Do You Know What is Paid-in Capital?

Paid-in capital is the capital that the investors have contributed to a company by purchasing the stock from that company in the primary market, but not from the secondary market. This is because if the investors buy the shares directly from the company, the party that receives the fund is the company, and the sum of money received will become the company’s paid-in capital. However, if the buyers buy the company’s share from the secondary market, which is the open market, the party that receives the fund will be the investor who sells them.

Paid-in capital is part of the shareholder’s equity, and it shows the funds that the shareholders have invested in the company by buying the company’s stock. This information is contained in the balance sheet of the company, and thus, business owners need to generate it carefully to avoid any possible errors as information regarding the capital of the company should be presented accurately. If they are not confident that they can do this well, hiring an accounting firm in Johor Bahru can be a good choice.

Paid-in capital is not the revenue that the business has generated by its daily operations. As against, it is the fund the business has collected by selling its equity shares. It is the capital that the investors have paid in when the company issues preference shares or common shares. All shareholders are considered as the company’s owner, where they invest money in the form of share capital, and the company will distribute dividends to them in return.

Some activities that the company carries out will bring an impact to the sum of paid-in capital of the company. During company incorporation, the investors purchase the company’s shares. As the company will fix the par value of each share, it will record the paid-in capital of the company at the par value in the balance sheet. After this, if the company wants to issue more share capital to raise funds for any large transactions, the investors will pay up for those share capitals. Then, the company will pass a new journal entry to record that the company’s paid-in capital has increased.

Besides, share repurchase (Also see Why Do Companies Repurchase Their Own Shares?) will also influence the sum of the company’s paid-in capital. The shares that the company has bought back will appear in the shareholder’s equity at the cost that the company has repurchased them. These are called the treasury stock. If the purchase cost is lower than the price at which the company sells the treasury stock, the company will credit the profit earned from the sale of the treasury stock in the calculation of paid-in capital. If the purchase cost is higher than the price the company sells the treasury stock, the company will deduct the loss from the sale of those treasury stocks from its retained earnings.

Other activities that affect the amount of paid-in capital include the issuance of bonus shares, the issuance of preferred shares and so on. To manage the paid-in capital well, business owners should have an in-depth understanding of the concept of paid-in capital and know the activities that will cause an impact on its amount. They should also use the capital wisely to ensure that the business can be sustainable and a successful one.