Banque D'Affaires

finance a la shmoop what are paid in capital and capital surplus all right

well first you start with the original thousand bucks grandma gave you or [Someone taking a check]

rather invested in you and that's an important difference to buy 10 percent

of your lemonade business and note the import therefore defining paid in

capital that grandma is buying a slice of your lemonade stand pie representing [Piece of the pie chart is highlighted]

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

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

for the mob so the thousand dollars is equity aka

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

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

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

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

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]

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

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

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]

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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