Paid-in capital refers to the amount of monetary capital that shareholders have contributed to the company.
Paid-in capital is one of the two main sources of shareholders’ equity. The other source of shareholders’ equity is retained earnings.
When individuals or companies contribute monetary capital to a corporation, they are issued stock shares in the corporation in exchange for their capital contribution. Once the shares are issued, the individuals or companies become stockholders in the corporation.
Corporations may or may not have a par value attached to their common stock. Par value is a value assigned to shares in the company’s articles of incorporation. When a corporation’s stock has a par value, the contributed equity capital is broken into two components: par value of common stock and paid-in capital in excess of par value.
For example, suppose Steve and Susie start a software company and plan to issue shares in the company to investors. The articles of incorporation state the per share par value at $1. Steve and Susie issue 100,000 shares in the company at $50 per share. How does the company account for the contributed capital?
The share issuance raises $5 million in equity capital for the business. The company recognizes the capital contribution by debiting cash for $5 million. The corresponding entry is made by crediting par value of common stock by $100,000 and crediting paid-in capital in excess of par value by $4.9 million.