What is paid-up capital?
The paid-up capital is the amount of capital “paid” by investors when issuing ordinary or preferred shares, including the nominal value of the shares themselves plus amounts greater than the nominal value. The paid-up capital represents the funds raised by the company by the sale of its equity and not by current commercial operations.
Paid-up capital also refers to an item on the company’s balance sheet in equity, often displayed next to the item for additional paid-up capital.
Key points to remember
- Paid-up capital is the total amount of cash or other assets that shareholders have given to a company in exchange for shares, the nominal value plus any amount paid in excess.
- The additional paid-up capital refers only to the amount greater than the nominal value of a share.
- The paid-up capital is presented in the equity section of the balance sheet.
- It is generally divided into two different items: ordinary shares (nominal value) and additional paid-up capital.
Understanding paid-up capital
For ordinary shares, paid-up capital, also called contributed capital, consists of the nominal value of a share plus any amount paid in excess of the nominal value. On the other hand, the additional paid-up capital only refers to the amount of capital greater than the nominal value or the premium paid by investors in exchange for the shares issued to them. Preferred shares sometimes have par values that are more than marginal, but most common stocks today have par values of a few cents. For this reason, “additional paid-up capital” tends to be essentially representative of the total amount of paid-up capital and is sometimes indicated by itself on the balance sheet.
Additional paid-up capital can provide a significant portion of a company’s capital before retained earnings begin to accumulate after several years of profit, and it is an important layer of capital to defend against potential business losses after that retained earnings have shown a deficit. Unless shares are withdrawn, the balance of the paid-up capital account, in particular the total nominal value and the amount of additional paid-up capital, should remain unchanged as a business carries on its activities.
Paid-up capital from the sale of own shares
Companies can buy back shares and return capital to shareholders from time to time. The repurchased shares are listed in the equity section at their redemption price in treasury shares, a counterpart account which reduces the total balance of equity.
If treasury shares are sold at a price higher than their redemption price, the gain is credited to an account called “paid-up capital from treasury shares”. If treasury shares are sold at a price lower than their redemption price, the loss reduces the company’s retained earnings. If treasury shares are sold at a price equal to their redemption price, deleting treasury shares simply brings equity back to its pre-redemption level.
Retired paid-up capital of own shares
Companies can choose to withdraw their own shares by withdrawing certain own shares, rather than reissuing them. Once withdrawn, the shares are canceled and cannot be reissued at a later date. The exit from treasury shares reduces the balance of paid-up capital applicable to the number of treasury shares restated.
If the initial redemption price of treasury shares was lower than the amount of paid-up capital linked to the number of shares withdrawn, the “paid-up capital resulting from the disposal of treasury shares” is credited. If the initial redemption price of own shares was greater than the amount of paid-up capital linked to the number of shares withdrawn, the loss reduces the company’s retained earnings.