Can Paid-In Capital Reduce in Value on a Balance Sheet?

by Karen Rogers

Small businesses can sell shares of their stock without going public by following the Securities and Exchange Commission’s regulations. Your corporate books must keep track of who purchased or sold each stock share along with the stock price. The paid-in capital account is the total amount of every stock transaction. This information is reported on your business balance sheet in the stockholders' equity section. Over time, the value of your paid-in capital account will fluctuate depending on whether the stock is bought or sold.

Paid-In Capital Account Components

The type of stock you authorized in your charter or articles of incorporation is reported in the paid-in capital account. Traditionally, preferred stock is listed first followed by common stock. Some states require that you assign a book value, also known as the par value, to your preferred and common stock. The number of shares that were authorized and issued is listed after each type of stock. For example, the accounting entry for common stock listed in the paid-in capital account would be shown as common stock, $1 par value, 2,000 shares authorized, 100 shares issued.

Stock Buyback

You can buy back your company’s stock to reduce the paid-in capital if it costs you more to buy back the shares than what you received when you sold them. For example, if you sold 100 shares at $8 a share, you received $800 from the sale. If you buy the shares back at $10 a share, it costs you $1,000 (100 shares multiplied by $10). To calculate the difference, subtract $800 from $1,000 to get $200. Paid-in capital is reduced by $200, and the lower balance is reflected on the balance sheet.

Liquidating Dividends

If your business issued dividend-paying stock and you don’t have enough cash to cover the total amount, you can pay the difference out of the paid-in capital account. This is known as a liquidating dividend, because you are liquidating the funds in your paid-in capital account. For example, if the total cash dividend is $10,000 and you have $6,000 in your cash account, the remaining $4,000 can come from paid-in capital. The paid-in capital amount is reduced by $4,000, and the new balance is reported on the balance sheet.

Vertical Merger

You can reduce a paid-in capital account down to zero through a vertical merger. A vertical merger happens when one company buys another company in the same industry but not in the same business. For example, a mobile phone manufacturing company buying a mobile phone component provider is a vertical merger. The company being acquired is known as the subsidiary. The purchasing company must invest an amount that equals or exceeds the subsidiary’s paid-in capital balance to eliminate that account. The paid-in capital account can be reduced to zero if the subsidiary was originally created, funded and owned solely by the acquiring company.

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