What is Capital in Excess of Par?
Capital in Excess of Par is a term that refers to the amount of money that a company receives from the sale of its shares in excess of the par value of those shares. The par value of a share is the minimum amount that a company can issue and sell it for. Capital in Excess of Par is recorded on the balance sheet under the equity section, specifically as a separate line item from the company's stated capital.
Accounting for Capital in Excess of Par
Accounting for Capital in Excess of Par involves creating a separate account to track this excess amount. This account is created to ensure that the company can differentiate between the amount of money it received from the sale of its shares and the par value of those shares. It is important to record Capital in Excess of Par accurately because it represents the true value of the company's equity.
The accounting entry for the sale of shares that have a par value involves recording the par value of the shares in the "Common Stock" account and the excess amount in the "Capital in Excess of Par" account. For example, if a company issues 1,000 shares at a par value of $1 per share and sells them for $5 each, the accounting entry would be as follows:
Debit Cash: $5,000
Credit Common Stock: $1,000
Credit Capital in Excess of Par: $4,000
The Common Stock account records the par value of the shares issued, while the Capital in Excess of Par account records the excess amount received. The total amount recorded in the equity section of the balance sheet would be $5,000.
Example for Capital in Excess of Par
To further illustrate the accounting for Capital in Excess of Par, consider the following table:
| Share Information |
|
|
| Number of shares |
10,000 |
|
| Par value per share |
$1 |
|
| Selling price per share |
$5 |
|
| Total common stock |
|
$10,000 |
| Capital in excess of par |
|
$40,000 |
| Total stockholders' equity |
|
$50,000 |
In this example, the company issued 10,000 shares at a par value of $1 per share and sold them for $5 each. The total amount received from the sale of the shares was $50,000 ($5 per share × 10,000 shares). The Common Stock account was credited for $10,000 (10,000 shares × $1 par value per share), and the Capital in Excess of Par account was credited for $40,000 ($4 excess amount per share × 10,000 shares).
The company would then record these amounts on its balance sheet under the equity section. The Common Stock account would show a balance of $10,000, the Capital in Excess of Par account would show a balance of $40,000, and the total stockholders' equity would be $50,000.
Significance of Capital in Excess of Par
Capital in Excess of Par is significant for several reasons.
#1
It represents the true value of the company's equity. When a company issues shares, it receives cash in exchange for ownership in the company. The amount of cash received is the total value of the equity, which includes the par value of the shares and any excess amount received.
#2
Capital in Excess of Par represents the amount of money that the company can use to finance its operations, pay off debt, or distribute to shareholders. Because this amount is recorded as part of the equity section of the balance sheet, it cannot be used to pay off liabilities or other obligations.
#3
Capital in Excess of Par is also important for financial analysis. It can be used to calculate various financial ratios, such as the
price-to-earnings ratio (P/E ratio), which measures the company's stock price relative to its
earnings per share (EPS). A company with a high P/E ratio may indicate that investors have high expectations for future growth and earnings, while a low P/E ratio may indicate the opposite.
Capital in Excess of Par can also affect a company's market value. If a company issues shares at a high selling price relative to the par value, it may signal to investors that the company is performing well and has a strong future outlook. This can result in a higher demand for the company's shares, which can drive up the market value of the company.
However, it is important to note that Capital in Excess of Par is not a measure of a company's profitability or financial performance. It is simply an accounting term that represents the excess amount received from the sale of shares. A company can have a large amount of Capital in Excess of Par, but still have low profits and weak financial performance.
Conclusion
In conclusion, Capital in Excess of Par is an important accounting term that represents the amount of money a company receives from the sale of shares in excess of the par value. It is recorded as a separate account in the equity section of the balance sheet and is significant for financial analysis and market valuation. However, it is not a measure of a company's profitability or financial performance and should be considered in conjunction with other financial metrics.
