Additional Paid-in Capital Journal Entry

Additional paid-in capital is the equity component that represents the value that shareholders paid over the common stock par value. When the company issue the common stock to the market, each stock attaches to the par value, however, the investors are willing to pay more than that. The difference between par value and cash received is considered as additional paid-in capital.

Common stock is the equity item that company issues to the capital market to raise the capital in exchange for transferring the ownership to the investors. The investors who purchase the common stock will become the owner of the company, and they will receive benefits from company profit or suffer from loss.

Each common stock will have a par value which represents the value assigned by the company. Par value printed on the share certificate and is usually the lowest value such as one cent. During the IPO, company sells the share to the market and raises the capital. The initial selling price of a share will be higher than the par value, and this amount will record as the additional paid-in capital.

Additional paid-in capital will be calculated and recorded during the IPO only. Any price change after the IPO will not impact the additional paid-in capital. It will stay as part of the equity section on the balance sheet.

Additional Paid-in Capital Journal Entry

When the company issues the share during IPO, the company record cash received and equity. The equity items include both common stock and additional paid-in capital. The common stock is equal to the number of issued shares multiplied by the par value. The additional paid-in capital is the difference between the selling price and par value.

The journal entry is debiting cash and credit Common Stock, additional paid-in capital.

Both common stock and additional paid-in capital will be present on the equity section of balance sheet.

Additional Paid-in Capital Journal Entry Example

At the beginning of the year, company ABC issued 1,000 common shares at $ 100 per share. Each share has a par value of $ 1. The company has successfully raised $ 100,000 share from the IPO. One month after the IPO, the share price increased to $ 150 due to the market demand. Please prepare journal entry for additional paid-in capital.

ABC has sold 1,000 shares to the capital market for $ 100 per share while the par value is only $1. It means the investors pay for additional paid-in capital of $ 99 per share. ABC needs to record commons stock and additional paid-in capital.

Additional paid in Capital = (Issue price – Par value) * Number of share = (100-1)*100,000 = $ 99,000

The journal entry is debiting cash $ 100,000 and credit common stock $ 1,000, additional paid in capital $ 99,000.

The transaction will increase cash on balance sheet by $ 100,000. It also increases common stock by $1,000 and additional paid-in capital $ 99,000 on the equity section.

After the IPO, the share price of ABC increases significantly to $ 150 per share. However, it is the price movement in the secondary market. It is the investors who receive such gain if they sell the shares. ABC does not receive any additional capital from the price increase, so it will not impact ABC’s financial statement as well as the additional paid-in capital.