What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community. Get Started Now!


Paid-in Capital Accounting Options

Original post by Matt Petryni of Demand Media

In accounting practice, a company is started when one of its investors pays in capital, either in exchange for stock, in the case of a corporation, or as a part of the company's operating agreement in other business structures. There are several ways to account for the investment of capital, and choosing the right method depends on state laws and the nature of the company's relationship with its investors.

Contents

Sales of Common Stock at Par

One option for recording paid-in capital is a sale of common stock at its par value. For bookkeeping purposes, businesses are generally required to assign an arbitrary per share value to the stock it issues. When shares are sold at this value, the business records the receipt of cash in its asset ledger and credits the common stock account under shareholder's equity. This method may only be used for companies that are organized as corporations, and issue common stock. It is not appropriate if the company received more from a shareholder than the par value would indicate.

In most cases, businesses do not sell their stock at its par value. The price of a share in the company can vary considerably, depending on the arrangement they have with an individual investor. Nonetheless, the business must account for the sale of common stock as if it was sold at par and record any remaining value collected from a shareholder as additional paid-in capital, or paid-in capital in excess of par value. The business only uses this accounting option if required by state laws to account for common and preferred stock at par value, and if the actual shares are sold not at the recorded par value but at whatever price is deemed appropriate by the companies and its investors.

Selling Stock for Non-Cash Benefits

While most businesses receive investments from their shareholders in the form of cash, they do have the option of issuing stock in exchange for assets, services or materials that they would otherwise have to purchase with the company's capital. In these cases too, the business will account for the sale of stock at par value and account for any value received in excess of par as additional paid-in capital.

It's also possible for businesses to account for paid-in capital that is not issued in exchange for stock. In the case of corporations that do issue stock, the company credits this kind of transaction to the additional paid-in capital account and does not record any changes to its various stock accounts. Partnerships and other businesses not organized as corporations do not record paid-in capital in stock accounts at all. Instead, the business credits the equity account of the individual investor or partner buying into the company, and debits an investor's withdrawal accounts when he or she takes pulls money out of the partnership for personal use.


                   

Resources

References

About the Author

Matt Petryni has been writing since 2007. He was the environmental issues columnist at the "Oregon Daily Emerald" and has experience in environmental and land-use planning. Petryni holds a Bachelor of Science of planning, public policy and management from the University of Oregon.


Advertisement