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Share Capital (Definition) | Formula | How to Calculate Share Capital? - YouTube
Channel: WallStreetMojo
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hello everyone hi welcome to the channel
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clicking the bell icon friends today we are
to learn a topic which is your share
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capital share capital is the part and
parcel of the balance sheet as you can
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see there is an extract that has been
taken over here we need to understand
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what exactly this is as you can see
there is a common stock a par value one
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with this number of shares and this one
is the authorized one and this number of
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shares are issued so let's understand
this what exactly is the share capital
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part see the share capital is the amount
of the money that you can call that as a
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money and the property that a company
receives through their equity financing
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you can see that you receive that money
with the help of equity financing it is
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the important aspect of the business
because you know it reflects how much a
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company has earned through the equity
shares at the time of the IPO so let's
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take a simple simple share capital
example to illustrate this let's say
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there's a company called kg Inc and it
had an IPO of let's say 6 years how
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much 6 years ago and by selling the
equity shares to the general public
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KG Inc let's say has so closely
to $1,000,000
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it has source closely to $1,000,000 in
the capital now since the kg Inc has
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become a big name and if the market
value of the has become closely to say
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$5 million because of the
increase in the market value
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however the KG Inc has raised only
$1,000,000 through the equity financing
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6 years ago the balance sheet will
reflect same only and not be 5 million
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it will reflect 1 million not the market
value of the 5 million
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now if the kg Inc would issued new
shares of let's say 0.5 or million
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dollars then the balance sheet of the kg
Inc would be reflecting how much it's
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gonna be a 1.1 + 0.5 that's a 1.5
million shares so this share capital
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example teaches as you know 2 important aspects the first and the
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foremost aspects is that it has nothing
to do with the market value of the
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company no matter what the market value
is at today balance sheet of the company
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will also record what has what it
and at the time of the IPO and secondly
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it takes into account the issue of the
form let's say 10,000 shares offer
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let's $10 each in its capital
would be 1000 that is 10,000 shares into
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10 right now if after 5 years the
market price of the share if that
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becomes 200 the capital will be only be
in total 1,00,000 that's gonna be the
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world capital until the firm issues the
new shares so let's understand this with
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the help of the formula see the share
capital formula is something like this
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the share capital formula is equal to
the issue price or share into number of
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shares outstanding number of outstanding
shares
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now this share capital formula can look
a simple formula but we need to break
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down the issue price into two main
components two components or one is
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called the par value and yet another
is called the additional paid-in capital
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that's the second the next formula take
it absolutely takes care of that the
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second formula for this you know the two
main component of the issue price the
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par value in the additional capital
where I'm gonna discuss the second
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formula with the par value the par
value is the amount that the firm can
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call its legal it can call its legal
capital you can say in other words par
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value is the minimum and amount the
price of the shareholders must pay to
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acquire the shares of the company and
secondly the additional paid-in capital
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is the amount that is in the excess of
the power value so if we deduct the
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par value from the issue price we'll
get the additional paid in capital so
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the formula will go something like this
share capital will be equal to your
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number of shares into the par value of
the stock par value of the stock we need
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to add the paid in capital over here in
excess of the par that will be in the
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excess of the power value so the share
capital formula is this one is the
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second formula let's understand the
third formula in this let's say for
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company issues or shares
at no-par value completely no power
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value then there would be no additional
paid in capital okay so we would create
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a contributed capital over here
no the contributed capital in this
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scenario accounts and you know it
transfers the whole amount to that let's
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say there is a company B which has
issued in total 10000 at a
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par value at 10 per share with the
number of par value so here we would
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transfer the whole amount that is 10000 shares into 10 that is 1
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million in total I mean that's this
should be 1 lakh okay so now 1 million
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will be to the contributed surplus
account and there will be no additional
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paid in capital so the concept of the
additional paid-in capital will come
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only when there would be par value
per share so the share capital over here
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will be equal to your common stock
proceeds let's understand this with the
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help of an example to get into a more
clear way let's take a share capital
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calculation example to illustrate this
let's say there's a company called kg
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Inc and it has issued let's say 1,00,000
shares at an issue price of 10 per share
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the par value over here is let's say
standing at $1 per share what we need to
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calculate is the share capital and its
par value amount and the additional
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paid in capital portion so the total
capital would be by using the share
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capital formula will go something like
this the share capital formula is equal
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to your issue price per share into
number of outstanding shares so that's
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gonna be 1,00,000 x 10 right that's 1
million so now it has 2 portion the
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par value amount and the additional
amount that is the paid in capital and
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here the par value is since $1
then the total par value amount would
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be gonna be the total number of shares
into 1 there'll be no change in that
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now if the power value of the share is
$1 per share and if the issue
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price per share is 10 per share then the
edit
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paid in capital per share would be is
equal to 10 - 1 that's $9 per share
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that means a total additional capital
that means a total additional paid in
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capital would be $9 x 1,00,000 shares
that's 9,00,000 and if we add the total
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par value amount and the additional
paid in capital we'll get the same
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amount that we got by multiplying the
issue price per share and the number of
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the shares outstanding right now
let's understand the share capital in
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the balance sheet see when a company
needs more money then it can raise the
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required capital in the multiple way it
can issue bonds or it can take a debt
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from the bank or even the financial
institution right so it can also take a
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debt from a bank or the financial
institution and it can also take the
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help of the equity shares and raise the
capital but how does it helps the
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company's balance sheet the assets and
liabilities we are talking about and
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that's the question I'm asked see when a
company issues equity or the preference
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shares it receives what cash now cash is
the asset it's an asset right and as the
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company is liable to the shareholders
the share capital would be a liability
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so by debiting the cash or recording you
can see the cash or as an asset and
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crediting the share capital or recording
as elaborate ii which will be created a
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company can balance both the asset and
the liability so that's it for this
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