What Is Paid-Up Capital and How Is It Calculated?
Learn how paid-up capital reflects the funds received from shareholders, providing a key measure of a company's financial base and overall solvency.
Paid-up capital is the total amount of money a company receives from shareholders who purchase shares of its stock. This figure represents capital invested directly by the company’s owners in exchange for ownership stakes. This form of capital is not borrowed and does not need to be repaid, making it a stable source of funds for business operations and growth.
Understanding Share Capital Components
To understand paid-up capital, it is helpful to know its place within a company’s share capital structure. This structure follows a hierarchy, starting with the maximum potential capital and narrowing down to the actual funds received. Each component represents a different stage in raising equity financing.
The sequence begins with authorized capital, the maximum amount of share capital a company is legally permitted to issue. This limit is defined in the company’s articles of incorporation and acts as a ceiling on the total value of shares offered to investors. For instance, a startup might establish an authorized capital of $1 million, allowing it to issue 100,000 shares with a nominal value of $10 each. This provides flexibility to raise funds without amending its corporate charter for each new issuance.
Issued capital is the portion of authorized capital that the company actively sells to investors, including shares offered during an Initial Public Offering (IPO). Continuing the example, the startup may issue 50,000 of its 100,000 authorized shares, making its issued capital $500,000. The remaining shares are unissued capital that can be offered later.
Subscribed capital is the portion of issued capital that investors have formally agreed to purchase, creating a commitment to buy. If investors agree to buy all 50,000 shares the startup issued, the subscribed capital would be $500,000. This represents the value of shares claimed by investors, even if payment has not been fully collected.
Finally, paid-up capital is the amount of money the company has actually received from shareholders for the subscribed shares. If the investors who subscribed to the 50,000 shares have fully paid for them, the company’s paid-up capital is $500,000. This amount reflects the cash available for the company to use.
Calculating Paid-Up Capital
The calculation of paid-up capital centers on the par value of the shares. Par value is a nominal value assigned to each share for legal and accounting purposes, often set at a low amount like $0.01 per share. The portion of paid-up capital related to par value is found by multiplying the number of shares purchased by the par value per share.
Shares are almost always sold for a price higher than their par value. The amount paid above the par value is captured in an account called “Additional Paid-in Capital” (APIC). This account reflects the premium investors are willing to pay based on the company’s perceived value. The total cash received from a share issuance is the sum of the par value component and the APIC.
For example, imagine a company issues 10,000 shares of common stock with a par value of $0.01 per share. The company sells these shares to investors for $20 each. The total proceeds from this sale would be $200,000 (10,000 shares x $20). The amount recorded as common stock at par value would be $100 (10,000 shares x $0.01). The remaining $199,900 would be recorded as Additional Paid-in Capital ($200,000 total proceeds – $100 par value).
The par value portion and the APIC are recorded separately within the shareholders’ equity section of the balance sheet. The formula for APIC is the issue price per share minus the par value per share, multiplied by the number of shares issued. This separation distinguishes the legal minimum capital from the market-driven premium paid by investors.
Reporting Paid-Up Capital on the Balance Sheet
Paid-up capital is a component of the Shareholders’ Equity section on a company’s balance sheet. This section details the ownership interest in the company and is scrutinized by investors, creditors, and other stakeholders. The presentation of paid-up capital provides insight into the company’s financial foundation and its ability to absorb losses.
Under U.S. Generally Accepted Accounting Principles (GAAP), paid-up capital is presented in two line items within Shareholders’ Equity. The first is “Common Stock” or “Preferred Stock,” which reflects the aggregate par value of all issued shares. The second is “Additional Paid-in Capital” (APIC), representing the funds received from shareholders in excess of the par value.
A clear presentation of these components is important for stakeholders. It shows the permanent capital base of the company—funds that are not owed to creditors and do not have to be repaid. A strong paid-up capital figure can enhance a company’s creditworthiness and signal financial stability to the market. It demonstrates the level of commitment from its owners and their confidence in the enterprise’s long-term prospects.
The balance sheet must also disclose the number of shares authorized, issued, and outstanding for each class of stock, which provides context to the paid-up capital amounts. This allows analysts to understand the company’s equity structure. It helps them assess how much capital has been raised from owners versus generated through earnings, reported as “Retained Earnings.”