Paid-In Capital

When a company issues new shares, the money it receives is recorded in equity as paid-in capital. It represents owners' direct investment, as opposed to retained earnings, which come from profits kept in the business.

In many countries, shares have a small nominal or par value, and the amount paid above it is recorded separately. For example, if a company issues 1 million shares with a par value of 0.10 at a price of 8 each, it receives 8 million. It records 100,000 as share capital at par and 7.9 million as additional paid-in capital, also called share premium. Together, they make up total paid-in capital of 8 million.

Paid-in capital can also increase when shares are issued to employees as part of share-based compensation.

Paid-in capital is usually permanent: the company does not have to repay it. In many legal systems, it cannot be paid out to shareholders as dividends except in specific circumstances, which helps protect creditors.

Looking at paid-in capital alongside retained earnings shows how much of a company's equity came from investors and how much was generated by the business itself.