What Is the Meaning of Paid Up Capital?
The money that a company receives from shareholders in exchange for its stock shares is known as Paid-up capital. Paid-up capital comes into existence when a company is selling its shares directly to investors on the primary market, usually through an initial public offering (IPO). When all the particular shares are being bought and being sold among the investors on a secondary market, also no additional paid-up capital is being created and a proceeds in those type of transactions, which goes for selling shareholders and not the issuing company.
SOME SPECIAL POINTS:
Paid up capital is money which a company have received by selling stock directly to their investors.
The market where the paid-up capital is received is only the primary market; it is usually through an initial offering by the public.
Funding for paid-up capital can be received from two sources-
- The par value of the stock.
- The excess capital.
- The amount of paid-up capital which is paid by the investors on behalf of the above the par value of a stock.
- Equity financing is basically represented by a paid-up capital.
Proper understanding of the Paid Up Capital:
Paid-up capital is also known as paid-in capital or even contributed capital, which is arrived at from two sources of funding sources-
- The par value of the stock.
- The excess capital.
Each share of stock can be issued with a base price which is also as known as its par. Typically, this value is relatively low, often less than 1 USD. Any amount paid by investors that exceed the par value is considered additional is paid-in a capital or a paid-in capital more than par. The par value of issued shares on the balance sheet have been listed as common stock or even as preferred stock under the section of shareholder equity.
E.g., if a company is basically issuing 100 shares of a common stock with a basically par value of 1 USD and it is sells them for a 50 USD each and the shareholders’ equity of balance sheet shows a paid-up capital a totalling 5,000 USD, a consisting of a 100 USD of common stock and a 4,900 USD of additional paid-up capital.
Major characteristics of the Paid Up Capital:
Paid-up capital do not need to be repaid, which is considered as a significant benefit of funding the business operations in a particular manner.
It is also known as paid-in capital, equity capital, or even as contributed capital. In simple words, paid-up capital is the total amount of money shareholders have paid for shares at the initial issuance. It does not include any amount that the investor later pays for purchasing the shares on the open market.
Paid-up capital might have costs which is associated with it. Paid up capital is most often mentioned to as equity capital in capital budgeting. If there is a great debate on the relative benefits of debt versus equity, the absence of required repayment is among equity’s can be the main advantages.
However, shareholders can expect a certain amount of return on their investments in the form of capital gains and dividends. While those businesses which does not require to return shareholder investment, in this case, the cost of equity capital can still be relatively high.
On the balance sheet, paid-up capital have been listed under the stockholder’s equity. Further, this category can be subdivided into the common stock and additional paid-up capital sub-accounts and know pay out ratio of share
The price of a share of stock comprises two parts-
- The par value.
- The additional premium that is paid is above the par value.
- The total par value of all sold shares has entered under the common stock section, while the remainder can be assigned for the additional paid-up capital account.
- Paid-up capital can also be used in the analysis of fundamentals. Companies utilizing the large amounts of equity funding might carry lower amounts of debt than those that do not.
- A debt to equity ratio of a company can be lower than the average for its industry can be a good candidate for investments because it indicates prudent financial practices and a being decreased a debt burden a relative to its peers.
Various importance of Paid Up Capital:
Paid-up capital can represent those money that is not borrowed. A fully paid-up company can also sell all the available shares, and thus the capital cannot be increased unless it is borrowing money by taking on debt. However, a company can receive authorization to sell more shares.
A company’s paid-up a capital figure can be represent with the extent to mainly which it would be depend on a equity financing for a funding and its operations. This figure can be compared with the level of the company’s debt for assessment if it is having a healthy balance of financing, given its operations, business model, and prevailing industry standards.
For various reasons, Companies are issuing shares of stock or equity This also includes fund expansion or paying down the debt. In this article, we will learn and know about the various terms that have been used in the process of issuing the stock for raising the capital.
Normally, share capital consists of all funds raised by a company in exchange for shares of either standard or shares of stock those are preferred. Over the period, the amount of share capital or equity financing a company have been changed. A company that is wishing to raise more equity can obtain authorization for issuing and selling additional shares to increase its share capital.
Share capital can only be generated by the initial sale of shares to investors by the company. But, it does not include shares that have been sold in a secondary market after they’ve been issued.
The highest value of share capital that a company has been authorized to raise is known as The Authorized Share Capital. This limit have been outlined in its constitutional documents and can only be changed with the shareholders’ approval. Before a publicly traded company can sell a stock, it must specify a specific limit to the amount of share capital authorized to raise.
In a Authorized share capital, as a company does not have usually issue being the total amount. Instead, of a some will be on then hold in a company’s reserve for a possible near future use. The value of a share capital or a equity financing being a company that have being in changed over the time. A company that is a wishing for a rising more than equity can then be obtained by the method authorization of a issuing and a selling additional shares, that can be increasing its share capital and EPS.
The total value of the shares of a company that have been elected for selling is known as the Issued Share capital. In other words, as according to a later date, a company might also elect for only issuing a portion of the total share capital with the plan of issuing more shares.
It is not necessary that all the shares might sell right away, and the par value of the issued capital cannot surpass the value of the authorized capital. The total par value of the company’s shares that the company is selling is called its paid share capital.
It is what most people referred to when speaking about share capital. Issued share capital can be simply the monetary value of the portion of shares of stock a company offers for sale to investors.
Paid Up Capital vs. Authorized Capital:
When a company needs to raise their equity, normally, it just cannot sell off pieces of the company to the highest bidder. Businesses must also request permission for issuing public shares by applying with the agency responsible for registering companies in the country of incorporation. In the United States, companies those who are wanting to “go public” have to register themselves under the rules of the commission of Securities and Exchange before issuing any kind of initial public offering.
The highest amount of capital a company is permitted to raise via stock sale is known as authorized capital. Normally, the amount of authorized capital a company applies for is much higher than its current need. It is done to quickly sell additional shares down the road if the need for further equity arises. Since the sale of shares only generates paid-up capital, the amount of paid-up capital can never exceed the authorized capital.
Frequently Asked Questions:
What do you mean by Paid Up capital?
The amount of money that the company have to receive from shareholders in exchange for stock shares is called Paid-up capital. Paid-up capital can be created when a company is selling its shares on the primary market directly to investors, usually through an initial public offering (IPO).
How to record Paid Up capital in Accounting?
Additional paid-in capital has been recorded on a company’s balance sheet under the equity section’s stockholders’ equity section. The additional is a paid-in capital is basically created whenever a company issues a type of new shares to or a repurchases of its shares from shareholders.
How to increase the Paid Up capital of the private company?
Following are the methods through which a company can increase its paid-up share capital:
Sweat equity shares.
Converting loans or debentures into shares.
Issue of bonus shares.
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