Companies set a par value for their shares, representing the minimum price. However, they may still sell those shares at a higher rate. This process results in capital in excess of par.
What is Capital in Excess of Par?
Capital in excess of par, often referred to as additional paid-in capital or paid-in surplus, is an accounting term denoting the amount of money investors pay for shares that exceeds the nominal par value assigned to those shares. Par value is a nominal figure, usually much lower than the actual market price of the shares, set by the company when it initially issues its stock.
The difference between the price paid by investors (the issue price) and the par value constitutes the capital in excess of par. This figure represents a component of shareholders’ equity on the company’s balance sheet. Capital in excess of par serves as a reflection of the additional capital that investors have contributed to the company beyond the nominal par value of the shares.
How to calculate Capital in Excess of Par?
Calculating capital in excess of par is a straightforward process and involves a simple formula. But first, companies must know the par value of the shares issued and the price at which investors have purchased those shares. Once established, they can use the following formula for capital in excess of par.
Capital in excess of par = (Issue price – Par value) x Number of shares
The above capital in excess of par formula has the following components.
- Issue price: represents the price at which investors have purchased the shares. It is the actual price paid by investors for each share.
- Par value: typically gets set by the company when it initially issues its stock. It is a nominal value per share and is often much lower than the actual market price.
- Number of shares: is the total number of shares issued at this particular issue price and par value.
Example
Green Co. issues 5,000 shares of common stock with a par value of $0.10 per share. Investors purchase these shares at an issue price of $5.00 per share. Based on this information, Green Co. can calculate its capital in excess of par using the following formula.
Capital in excess of par = (Issue price – Par value) x Number of shares
Capital in excess of par = ($5.00 – $0.10) x 5,000 shares
Capital in excess of par = $24,500
So, for this stock issuance, Green Co. has capital in excess of par amounting to $24,500. It represents the additional paid-in capital contributed by investors beyond the nominal par value of the shares.
What is the accounting for Capital in Excess of Par?
The accounting treatment for capital in excess of par involves recognizing it as a vital component of shareholders’ equity on a company’s balance sheet. This accounting practice is applied when a company issues shares at a price that surpasses their nominal par value. The excess amount, representing the capital contributed by investors beyond the par value, is recorded as capital in excess of par.
Companies usually use the “additional paid-in capital” or “paid-in surplus” section within shareholders’ equity for capital in excess of par. The inclusion of this figure provides a comprehensive view of the financial structure and resources available to the company for various corporate purposes, including funding growth endeavours, debt retirement, and meeting operational expenses.
Conclusion
Capital in excess of par represents the additional funds a company receives by selling its shares above their par value. The amount received for those shares represents its issue prices, which differ for every share. Companies must calculate capital in excess of par to account for them separately. In the balance sheet, it may also appear as additional paid-in capital or paid-in surplus.
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