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Share Capital

What is Share Capital?

Share capital (shareholders’ capital, equity capital, contributed capital,Contributed SurplusContributed surplus is an account in the shareholders’ equity section of the balance sheet that reflects excess amounts collected from the or paid-in capital) is the amount invested by a company’s shareholders for use in the business. When a company is first created, if its only asset is the cash invested by the shareholders, the balance sheet is balanced with cash on the left and share capital on the right side.

Share capital is a major line item but is sometimes broken out by firms into the different types of equity issued. There can be common stock and preferred stock, which are reported at their par value or face value. Note that some states allow common shares to be issued without a par value.

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Share capital is separate from other types of equity accounts. As the name “additional paid-in capital” indicates, this equity account refers only to the amount “paid-in” by investors and shareholders, and is the difference between the par value of a stock and the price that investors actually paid for it.

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share capital

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Share Capital and the Balance Sheet

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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.

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Contributed Surplus and Additional Paid-in Capital

Share capital may also include an account called contributed surplus or additional paid-in capitalAdditional Paid In CapitalAdditional Paid In Capital (APIC) is the value of share capital above its stated par value and is listed under Shareholders’ Equity on the balance sheet..

Contributed Surplus is an accounting item that’s created when a company issues shares above their par value or issues shares with no par value. If a company raised $1 million from shares that had a par value of $100,000 it would have a contributed surplusContributed SurplusContributed surplus is an account in the shareholders’ equity section of the balance sheet that reflects excess amounts collected from the 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.

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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 Capital)$1,000,000 total share capital

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More Resources

CFI is the official provider of the Financial Modeling and Valuation Analyst (FMVA)™Become a Certified Financial Modeling & Valuation Analyst (FMVA)®CFI’s Financial Modeling and Valuation Analyst (FMVA)® certification will help you gain the confidence you need in your finance career. Enroll today! certification program, designed to transform anyone into a world-class financial analyst.

To keep learning and developing your knowledge of financial analysis, we highly recommend the additional CFI resources below:

Balance Sheet OverviewBalance SheetThe balance sheet is one of the three fundamental financial statements. The financial statements are key to both financial modeling and accounting.Debt ScheduleDebt ScheduleA debt schedule lays out all of the debt a business has in a schedule based on its maturity and interest rate. In financial modeling, interest expense flowsInvestment MethodsInvestment MethodsThis guide and overview of investment methods outlines they main ways investors try to make money and manage risk in capital markets. An investment is any asset or instrument purchased with the intention of selling it for a price higher than the purchase price at some future point in time (capital gains), or with the hope that the asset will directly bring in income (such as rental income or dividends).Debt to Equity RatioDebt to Equity RatioThe Debt to Equity Ratio is a leverage ratio that calculates the value of total debt and financial liabilities against the total shareholder’s equity.

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