Finance: What is Paid-In-Capital/Surplus?

What is paid-in-capital and capital surplus? Hit play to find out.

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Transcript

00:26

10 percent ownership of your company thousand bucks for ten percent she's not

00:31

giving you a low interest rate loan despite her career as a collection agent [Grandma holding a rolling pin and threatening someone]

00:35

for the mob so the thousand dollars is equity aka

00:38

ownership that capital is paid in and it's likely that in order to build the

00:44

16,000 lemonade stand stores that you dream of you will need to attract other [Lots of lemonade stands appearing]

00:49

investors who will then pay in more capital to own incremental percentages [Investors handing over cash for equity]

00:54

of your business as your own original hundred percent ownership when you

00:59

founded it it's diluted down to a sum much smaller number than the 90 percent [The kids piece of the pie chart gets smaller]

01:03

you own after Grandmama's grand but things go well and it turns out

01:07

amazingly that you didn't need to sell anymore equity in your company you were

01:12

able to grow by taking short-term loans which you then paid off by charging five [Lemonade stand taking loans from a brokerage, investors and a bank]

01:17

bucks a cup for the Absinthe kicker it was a huge hit among third graders so [Kid looking tired]

01:22

after four years you found yourself with a hundred ninety six thousand dollars in

01:26

cash in your lemonade stand bank account yes you had five grand worth of cups in [ATM showing the balance]

01:31

inventory a bunch of sugar and some other things yes they are probably

01:34

convertible quickly into cash but if you converted them quickly you would also [Liquid stamp]

01:39

suffer a massive discount in pricing because while semi used cups or at least

01:44

ones that have previously been sold even if they're in their original packaging

01:47

while they probably don't do well on eBay so for your purposes in assessing [Cups for sale on eBay]

01:51

your own capital surplus here you're going to ignore inventory and all of the

01:56

other elements that in a big or real company well you'd have to account for [Inventory items being crossed out]

02:00

at least consider when you thought about how liquid your company was and yes [Kid thinking of lots of cash floating on the sea]

02:03

that's not a reference to the product you actually sell so of that hundred

02:07

ninety six thousand dollars well one hundred ninety five grand of that

02:11

cash was capital surplus or just capital aka cash that came in the form of [Capital surplus calculation]

02:17

after-tax profits that you kept in your company as you grew it from a nothing to

02:22

something now that's how you make the most of your seed money [A hole being dug and seeds being planted]