What Is Par Value in Accounting for Stocks and Bonds?

Par value is a foundational concept in accounting, particularly important for understanding corporate finance. It represents a nominal monetary amount assigned to shares of stock or bonds by a company. While historically a legal minimum, its role has evolved, primarily serving accounting and regulatory functions in today’s financial landscape. This initial assignment of value plays a specific part in how a company’s capital structure is presented in its financial statements.

Defining Par Value

Par value, also known as face value, is an arbitrary monetary amount assigned to each share of stock through a company’s corporate charter. For common and preferred stock, this value often bears no direct relation to the stock’s actual market price. Companies typically set par value at a very low, almost symbolic, amount, such as $0.01 or $1.00 per share. This low figure helps minimize legal complications related to issuing stock below par.

For bonds, par value represents the principal amount that the bondholder will receive at the bond’s maturity date. It is also the amount upon which periodic interest payments are calculated. This highlights that while stock par value is largely nominal, bond par value is a fundamental component of the debt instrument’s financial terms. Historically, par value for stock served as a legal minimum contribution from investors, intended to protect creditors by ensuring a certain amount of capital remained within the corporation.

Par Value and Stock Issuance

Par value influences the accounting treatment when a company initially issues shares, dictating how the equity section of the balance sheet is structured following a stock issuance. The par value of the newly issued shares is recorded in the “Common Stock” account or the “Preferred Stock” account, depending on the type of shares issued. This account reflects the total par value of all outstanding shares.

Any amount received from the sale of stock that exceeds its par value is recorded separately in an account known as “Additional Paid-in Capital” (APIC). For example, if a company issues 1,000 shares with a par value of $0.01 each for an issue price of $10 per share, $10.00 (1,000 shares $0.01) is credited to the Common Stock account. The remaining $9,990.00 (1000 shares ($10.00 – $0.01)) is credited to the Additional Paid-in Capital account.

Par Value and Other Valuations

Par value has almost no relation to a stock’s market price. A stock’s market value is determined by factors such as supply and demand, the company’s financial performance, prevailing economic conditions, and investor sentiment. Therefore, a stock with a $0.01 par value can trade for hundreds of dollars per share in the market, illustrating the disconnect between these two figures.

Book value per share also differs significantly from par value. Book value per share is calculated by dividing a company’s total shareholders’ equity (assets minus liabilities) by the number of outstanding shares. This metric represents the net asset value attributable to each share and is typically much higher than the nominal par value. Par value is not an indicator of a company’s financial health, its stock’s intrinsic worth, or its market performance. Its primary significance is in its historical accounting role.

No-Par Stock

An alternative to par value is “no-par stock,” issued without an assigned par value in the company’s corporate charter. The accounting treatment for no-par stock simplifies the process, as it removes the distinction between par value and additional paid-in capital. When no-par stock is issued, the entire amount received from the sale of the shares is typically credited directly to the “Common Stock” account.

In some jurisdictions, if the board of directors assigns a “stated value” to no-par shares, that amount might be credited to a “Stated Capital” account, with any excess going to Additional Paid-in Capital, similar to par value stock. Companies may choose to issue no-par stock to simplify their accounting records, avoid complexities, or offer a more straightforward representation of the capital contributed by shareholders.