How to Calculate Par Value Per Share

Par value is a fixed dollar amount assigned to a share of stock or a bond when it is initially issued. This value is also known as face value or nominal value. Historically, par value played a role in establishing legal capital, which was intended to protect a company’s creditors. While its practical significance has diminished, par value remains a foundational concept in corporate finance and accounting, influencing how equity is recorded and presented in financial statements. It does not typically reflect the market value of a stock, which fluctuates based on supply and demand.

Defining Par Value

Par value is an arbitrary or nominal value assigned to each share of stock by a company during its formation. Its original purpose was to create a “legal capital” floor, ensuring that a minimum amount of equity remained within the business. This mechanism aimed to protect creditors by limiting the amount of capital that could be distributed to shareholders through dividends or other means.

Many companies today choose to issue stock with a very low or even zero par value, often as little as one cent per share. This practice helps to minimize potential liability for the company if the stock’s market price were to fall below its par value. Issuing low or no-par stock can simplify accounting and avoid certain taxes or fees, though some jurisdictions still require a par value.

The concept of par value differs between common stock and preferred stock. For common stock, par value is usually nominal and bears little relation to the actual market price at which shares trade. Its primary function for common shares is accounting classification.

Conversely, preferred stock often has a par value that holds more direct financial implications. Preferred dividends are commonly calculated as a percentage of this par value. For instance, a preferred stock with a $100 par value and a 5% dividend rate would pay $5 per share annually in dividends. In the event of a company’s liquidation, preferred shareholders typically have a claim to receive their stock’s par value before common shareholders receive any distribution.

Accounting Impact of Par Value

Par value fundamentally influences the presentation of a company’s equity accounts. When shares are issued, the proceeds are divided between the par value portion and any amount received above par.

The total par value of issued shares is determined by multiplying the number of shares issued by the par value per share. For example, if a company issues 10,000 shares of common stock with a par value of $1 per share, the common stock account would be credited for $10,000. If these shares were sold for $1 per share, the company records $10,000 in cash and credits the common stock account.

When shares are issued for a price exceeding their par value, the excess amount is recorded separately as “additional paid-in capital” or “paid-in capital in excess of par.” This additional paid-in capital is calculated by subtracting the par value from the issuance price and then multiplying the result by the number of shares issued. For instance, if the same 10,000 shares with a $1 par value were sold for $10 per share, the common stock account would still be credited for $10,000 (10,000 shares x $1 par). The additional paid-in capital would amount to $90,000 (($10 – $1) x 10,000 shares). The company would record $100,000 in cash, credit Common Stock (Par Value) for $10,000, and credit Additional Paid-in Capital for $90,000.

Some jurisdictions permit companies to issue “no-par value stock,” meaning no par value is assigned to the shares. In such cases, the entire proceeds from the stock issuance are typically credited directly to the Common Stock account. For example, if 10,000 shares of no-par common stock are issued for $10 per share, Cash would be debited for $100,000, and Common Stock would be credited for $100,000.

Balance Sheet Presentation

The accounts influenced by par value are presented within the Shareholder’s Equity section of a company’s balance sheet. This section provides a breakdown of the ownership interests. Contributed capital from shareholders is typically segregated into distinct line items based on the par value concept.

Common Stock (or Preferred Stock, if applicable) is generally presented at its aggregate par value, calculated as the number of shares issued multiplied by the par value per share. The Additional Paid-in Capital account reflects the total amount received from shareholders in excess of the stock’s par or stated value. This separation offers transparency into the original sources of equity funding.

For example, a simplified Shareholder’s Equity section might appear as follows: Common Stock, $1 par value, 10,000 shares issued and outstanding: $10,000; Additional Paid-in Capital: $90,000. These two components sum to the total contributed capital from share issuances. This presentation highlights that while par value may be nominal, its role in segregating contributed capital into the par value portion and additional paid-in capital is a standard practice in financial reporting.