Capital in Excess of Par is an accounting term used in corporate finance to denote the amount of capital raised by a corporation through the sale of stock that exceeds the par value assigned to each share. Also referred to as additional paid-in capital or share premium, it represents the difference between the issue price of the shares and their par value.
Explanation:
When a corporation issues stock, it assigns a par value to each share, which represents the nominal value or face value of the stock. This par value is typically a relatively small amount determined at the time of incorporation and is stated on the stock certificate. The capital received by the corporation from the sale of shares is recorded in the company’s accounts under the capital stock account, while any amount received in excess of the par value is allocated to the Capital in Excess of Par account.
The Capital in Excess of Par account is classified as part of the shareholders’ equity section of the balance sheet. It reflects the additional amount invested by shareholders above and beyond the stated par value of the shares. This represents the shareholders’ willingness to invest more in the company, giving them a claim on the company’s assets (net of liabilities) above the amount specified by the par value.
Capital in Excess of Par is typically generated when a company issues stock at a price higher than its par value. This can be due to various factors, such as the company’s reputation, financial stability, growth prospects, or anticipated future earnings. Investors may be willing to pay more for shares if they believe the company will generate substantial profits or experience significant growth in the future.
The amount recorded under Capital in Excess of Par does not represent an actual inflow of cash to the company but rather the value difference between the issue price and the par value. This additional paid-in capital can be utilized by the company for various purposes, such as funding expansion projects, repaying debt, acquiring assets, or distributing dividends to shareholders. It provides the company with additional financial flexibility and enhances its capital base.
When a corporation repurchases its own shares, any excess amount paid over the repurchased shares’ par value is recorded as a reduction in the Capital in Excess of Par account. This reduction represents a returning of the excess capital to the shareholders, reflecting a decrease in the shareholders’ equity.
Overall, Capital in Excess of Par is an essential concept in corporate finance that represents the additional financial resources contributed by shareholders above the par value of shares. It reflects the confidence and support of investors, allowing companies to strengthen their financial position and seize growth opportunities. Understanding this term is crucial for accountants, financial analysts, and investors in evaluating a company’s financial health and performance.
