Paid in Capital

What is Paid in Capital?

Paid in Capital refers to the amount of money paid in or amount of capital contributed by the investors in exchange for the shares of a company purchased by them in other words paid in capital (PIC) reflects the aggregate sum of money received by the company from its shareholders in exchange of its shares.

Explanation

It is the capital contributed by the shareholders in the company. It is received only in the primary market when the shares are issued for the first time. It can be divided further into two other lines where the first item is referred to as common stock (share capital reported at par value) and the other is additionally p.i. capital and it is the amount that the company received in excess of its nominal value or par value of the share. The PIC is reported on the balance sheet of the company on the equity and liabilities side under the head shareholders’/owner’s equity.

Features

The following are the main features of PIC:

• The PIC reported in the balance sheet shows the capital contribution of the investors in total and not of the individual investors.
• The PIC only shows the capital contribution of the investors at the time of initial issuance of the share and does not take into account the amount financed by investors on a later date to purchase the shares from the open market.
• The PIC is bifurcated into two categories; common stock which represents the par value of shares issued and second is additional financed capital which represents any amount received in excess of par value (when shares are issued at a premium).
• It is reported on the balance sheet of the company under the equity head.
• When the company buybacks its own shares then it reduces the paid up capital of the company.
• The PIC is that portion of called-up capital of the company which is actually paid by the shareholders whereas called-up capital is the sum of money that the company has asked the investors to pay.
• The paid up capital of the company cannot exceed its authorized share capital.
• The company declares a percentage of dividends that is to be financed to the shareholders and such percentage is applied to the PIC to calculate the dividend amount.

Formula for Paid in Capital

Formula for calculating the PIC is,

Paid in Capital = Total No of Shares Issued * Issue Price 

Or

Paid in Capital = Common Stock + Additional Paid in Capital

Where,

In the first formula,

The total number of shares issued is the total capital issued by the company to its shareholders. Issue price is the amount at which the shares are issued to the shareholder.

In the second formula,

Common stock is issued as a number of shares multiplied by the par value of the share. Additional PIC is the issued number of shares *(Issue price – face value of share)

Example

Suppose a company Happy Inc. is engaged in the business related to the manufacturing of furniture. The balance sheet of the company shows the following data as of 31.03.2020.

Particulars	Amount
Authorized share capital	$2,000,000
Common stock	$1,200,000
Additional PIC	$60,000
Retained earnings	$750,000
Issue price of share	21 per share
Face value of share	$20 per share
Total number of outstanding shares	60,000

From the above data calculate the financed capital of the company.

Solution:

Method 1

The formula to calculate the PIC is as follows-

Paid in capital = Total no of shares issued * Issue price

Calculation of PIC

 Method 2

The formula to calculate the p.i. capital is as follows-

Paid in Capital = Common Stock + Additional Working Capital

Calculation of p.i. capital

Particulars	Amount
Common stock(A)	$1,200,000
Additional Working Capital(B)	$60,000
P.I. capital(A+B)	$1,260,000

Paid in Capital vs Paid up Capital

The PIC is the amount of money received by the shareholders in exchange for the shares allotted to them and the PIC is also known as paid up capital or the contributed capital.

Advantages

1. Paid up capital is not the borrowed capital of the company so the company is not bound to pay the fixed cost of such capital.
2. The high paid up capital is a good indicator of its financial position because it shows that the company is having lower burdens of debt.
3. The value of PIC is used to calculate various financial ratios such as the debt-equity ratio (debt/equity). The lower debt ratio indicates that the burden of debts is lower and vice versa.
4. The funds raised can be used for any purpose as there is no restriction on the company related to the usage of funds.

Disadvantages

1. Although the cost of financing is high in debt funding but the investor while contributing expects a return in the form of dividends and capital appreciation which may result in the high cost of equity.
2. From the investor’s point of view, the return is very uncertain as the PIC does not guarantee them any gains, dividends, growth, etc.
3. The ownership and the management control is diluted by the issuance of common stock as the shareholders are given the right to participate and vote in the affairs of the company.

Conclusion

Thus, p.i. capital is the capital contributed by the shareholders in the company. It is shown in the equity section of the balance sheet. P.I capital includes both common stocks as well as the additional p.i. capital and the value of paid in the capital are used to measure the financial ratios such as solvency ratios.

Recommended Articles

This is a guide to Paid in Capital. Here we also discuss the definition and features of paid in capital along with advantages and disadvantages. You may also have a look at the following articles to learn more –

1. Capital Reserve 
2. Capital Lease Criteria
3. Finance Lease
4. Capitalization Ratio