Definition: Paid in Capital is the amount of cash or other assets that owners put into a company for stock. Notice that paid in capital can exist with either a contribution of cash or assets. This is particularly important for new and start up corporations. A lot of time new companies don’t need cash as much as they need equipment. Investors can contribute equipment and receive stock in exchange.
What Does Paid-In Capital Mean?
To understand this concept, you have to understand how owner’s equity in general works. Owner’s equity of stockholder’s equity is the amount of the business or business assets that the owner’s actually own. Owner’s equity is also referred to as net assets for this reason.
If a company sells all of its assets and uses the money to pay off all of its liabilities and debts, the stockholders would own whatever amount of money is left over. So how does an owner get equity in a company? Owner’s Equity is made up of two parts: paid in capital and retained earnings.
Keep in mind that paid in capital doesn’t just happen when a company starts. Whenever investors or current shareholders contribute money to a corporation, paid in capital is created.
Example
Here’s a good example. When an investor gives a company $100 or some asset worth $100 for stock in the company, the new shareholder receives $100 of owner’s equity for the $100 that he just paid into the company. That’s where the name comes from. The amount of money that paid into the company is recorded as paid in capital in the owner’s equity account.
