What is Share Capital?
Share capital (shareholders’ capital, equity capital, contributed capital or paid-in capital) is the amount invested by a company’s shareholders for use in the business. When a company is created, if its only asset is the cash invested by the shareholders, the balance sheet is balanced on the right side through share capital, an equity account.
Share capital is a major line item but is sometimes broken out by firms into the different types of equity issued. This can represent common stock and preferred stock, the latter including the par value of the stock.
Share capital is separate from other equity generated by the business. As the name “paid-in capital” dictates, this equity account refers only to the amount “paid-in” by investors and shareholders, as opposed to the amounts generated by the business itself which flows into the retained earnings account.
Share Capital and the Balance Sheet
Through the fundamental equation where assets equal liabilities plus equity, we can see that assets must be funded through one of the two. One method for a company to fund its assets is to create liabilities (borrow money or issue debt) and therefore create obligations that must be paid back. The other option is to issue equity through common shares or preferred shares. In exchange for an ownership interest claim to the company, the company receives cash from investors and shareholders.
Contributed Surplus and Additional Paid-in Capital
Share capital includes two additional balance sheet accounts that are important to be aware of, which are contributed surplus and additional paid-in capital.
Contributed Surplus is an accounting item that’s created when company issues shares above their par value or issues shares with no par value. If a company raised $10 million from shares that had a par value of $100,000 it would have a contributed surplus of $900,000. The par value of shares is essentially an arbitrary number as shares cannot be redeemed for their par value.
Additional Paid-in Capital is the same as described above when shares are issued above their par value.
In summary, if a company issued $10 million of common shares with $100,000 par value, it’s equity capital would break down as follows:
- $100,000 Common Shares
- $900,000 Contributed Surplus (or Additional Paid-in Captial)
- $1,000,000 total share capital
Learn more about the Balance Sheet
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