The principal component of the shareholders’ equity section is the paid-in capital accounts. Paid-in capital reports the total amount of equity capital invested in the company by the firm’s shareholders or through the capitalization of earnings, consisting of a company’s outstanding capital stock and paid-in surplus. It shows the total amount of cash and contributions in kind (i.e., property and services) that have been paid into the company by its shareholders.
The paid-in surplus account shows all amounts received by the company:
- In excess of the par or stated share value of the issued capital stock;
- From the capitalization of earnings; and
- Through debt recapitalization.
When raising capital through a new issue of no-par shares and if a stated value is required, the stated value per share is assigned to the capital stock account, with any amount exceeding the stated value is recorded as paid-in surplus.
| Paid-In Capital |
| Outstanding Capital Stock |
| + Paid-In Surplus |
| = Paid-In Capital |
The paid-in capital account may include capitalized earnings. The capitalization of earnings is the transfer of retained earnings to paid-in capital accounts, where it is capitalized – typically achieved by means of stock dividends.