how additional paid in capital apic works
during its ipo a firm is entitled to set any price for its stock that it sees fit meanwhile investors may elect to pay any amount above this declared par value of a share price which generates the apic this apic is also known as contributed surplus let us assume that during its ipo phase the xyz widget company issues one million shares of stock with a par value of 1 per share and that investors bid on shares for 2 4 and 10 above the par value let us further assume that those shares ultimately sell for 11 consequently making the company 11 million in this instance the apic is 10 million 11 million minus the par value of 1 million therefore the company s balance sheet itemizes 1 million as paid in capital and 10 million as additional paid in capital once a stock trades in the secondary market an investor may pay whatever the market will bear when investors buy shares directly from a given company that corporation receives and retains the funds as paid in capital but after that time when investors buy shares in the open market the generated funds go directly into the pockets of the investors selling off their positions apic is recorded at the initial public offering ipo only the transactions that occur after the ipo do not increase the apic account special considerationsapic is generally booked in the se section of the balance sheet when a company issues stock there are two entries that take place in the equity section common stock and apic the total cash generated by the ipo is recorded as a debit and the common stock and apic are recorded as credits note that the cash recorded is reported in the asset section of the balance sheet while common stock and apic are reported in the equity section of the balance sheet the apic formula is due to the fact that apic represents money paid to the company above the par value of a security it is essential to understand what par actually means simply put par signifies the value a company assigns to stock at the time of its ipo before there is even a market for the security issuers traditionally set stock par values deliberately low in some cases as little as a penny per share in order to preemptively avoid any potential legal liability which might occur if the stock dips below its par value market value is the actual price a financial instrument is worth at any given time the stock market determines the real value of a stock which shifts continuously as shares are bought and sold throughout the trading day thus investors make money on the changing value of a stock over time based on company performance and investor sentiment additional paid in capital vs paid in capitalpaid in capital or contributed capital is the full amount of cash or other assets that shareholders have given a company in exchange for stock paid in capital includes the par value of both common and preferred stock plus any amount paid in excess additional paid in capital as the name implies includes only the amount paid in excess of the par value of stock issued during a company s ipo both of these items are included next to one another in the se section of the balance sheet benefits of additional paid in capitalfor common stock paid in capital consists of a stock s par value and apic the latter of which may provide a substantial portion of a company s equity capital before retained earnings begin to accumulate this capital provides a layer of defense against potential losses in the event that retained earnings begin to show a deficit another huge advantage for a company issuing shares is that it does not raise the fixed cost of the company the company doesn t have to make any payment to the investor even dividends are not required furthermore investors do not have any claim on the company s existing assets after issuing stock to shareholders the company is free to use the funds generated any way it chooses whether that means paying off loans purchasing an asset or any other action that may benefit the company 