Why can additional paid in capital never have a negative balance?

The additional paid-in capital figure on a company's balance sheet can never be negative because companies do not pay investors to take shares of stock off their hands.

When a business needs funds to finance growth, it can do so through the acquisition of debt or through the issuance of shares of stock to generate equity capital. Paid-in capital, also called contributed capital, is simply the section of the balance sheet where companies list the equity capital generated by the sale of stock.

Because paid-in capital refers to the amount of funding generated by the sale of stock on the primary market, the minimum amount of paid-in capital is zero if the company has never issued stock. However, this number can never be negative.

The paid-in capital section of the balance sheet is subdivided into two sections: the common stock or preferred stock section, depending on the type of stock issued, and the additional paid-in capital section.

The common stock, or preferred stock, entry represents only the par value of all stock issued. The par value of stock is simply its stated value at issuance. Because of the financial liability this valuation entails, most businesses issue stock with a par value of $1 or less, often 1 cent. The remainder of the purchase price is included under additional paid-in capital.

Assume company ABC issues 100,000 shares of common stock to fund a new project. The par value is set at 10 cents per share and the selling price is $25 per share. The total amount of paid-in capital entered on the balance sheet is 100,000 * $25, or $2.5 million. The common stock entry is 10 cent* 100,000, or $10,000. The additional paid-in capital entry is then $25 * 100,000 - $10,000, or $2.49 million.