why par value is important for investors
par value is a primary component of fixed income securities such as bonds and represents the value of a contractual agreement a loan between the issuing party and the bondholder the issuer of a fixed income security is liable to repay the lender the par value on the maturity date companies issue shares of stock to raise equity and those that issue par value stocks often do at a value inconsistent with the actual market value this adjustment allows companies to minimize their and the shareholders contractual obligations as par value carries a binding contract between an organization and its shareholders par value and accountingpar value plays a role in accounting when a company issues shares the par value of these shares is recorded in the common stock account on the balance sheet any amount received above the par value is recorded in the additional paid in capital apic account therefore there are accounting and reporting presentation implications for what the par value is for example if shares with a par value of 1 are sold for 5 each 1 per share is recorded in the common stock account and the remaining 4 per share is recorded in apic this separation helps clearly distinguish between the nominal value of shares and the additional capital contributed by shareholders the issuance of par value stock does impact the presentation of the equity section of the balance sheet though the ultimate dollar amount isn t impacted this distinction provides transparency regarding the source of equity capital while par value does not directly influence dividend payments it impacts the calculation of legal capital ensuring that a minimum amount of retained earnings is preserved to meet creditor protection requirements therefore it is important from an accounting perspective that these two amounts are recorded differently this is also in accordance with gaap treatment for stocks issued with no par value the total proceeds are credited to the common stock account simplifying the equity classification and eliminating the concept of legal capital associated with par value therefore there is some accounting simplicity with this method though they may have hurdles that prevent them from being able to do so 