What is Contributed Capital?
Contributed capital, also known as paid-in capital, represents the cash and other assets that shareholders have provided to a company in exchange for its stock. Investors facilitate capital contributions when a company issues equity shares at a price that shareholders are willing to pay. The total contributing capital signifies shareholders’ ownership or stake in the company.
Contributed capital is a significant part of stockholders’ equity on the balance sheet. It consists of common stock and additional paid-in capital, often known as contributed surplus. When a company issues preferred stocks, this figure also appears within the contributed capital category on the balance sheet.
Essential Insights into Contributed Capital
Contributed capital embodies the total value of the stock shareholders have purchased directly from the issuing company. This value encompasses funds from initial public offerings (IPOs), direct listings, direct public offerings, and secondary offerings, including preferred stock issues. It also includes the receipt of fixed assets in exchange for stock and the reduction of a liability in exchange for stock.
Key Takeaways
- Contributed capital, or paid-in capital, includes the cash and other assets shareholders provide in exchange for stock.
- It represents the price shareholders paid for their stake in the company.
- This capital is documented in the shareholder’s equity section of the balance sheet, split between the common stock and additional paid-in capital accounts.
Diverse Forms of Capital Contributions
Capital contributions serve as cash injections into a company and can occur in multiple forms aside from equity share sales. For instance, an owner might secure a loan and utilize the proceeds as a capital contribution. Additionally, companies may receive capital in non-cash forms, such as buildings or equipment. Such contributions bolster owners’ equity. However, the term ‘contributed capital’ typically refers exclusively to amounts garnered from issuing shares, excluding other means of capital contribution.
When companies repurchase shares and refund capital to shareholders, the repurchased shares are listed at their buy-back price, thus diminishing shareholders’ equity.
Calculating Contributed Capital
Contributed capital appears in the shareholder’s equity section of the balance sheet, primarily segmented into common stock and additional paid-in capital accounts. This capital includes the par value of stock, indicated in the common stock account, and the premium over the par value that shareholders were willing to pay—this surplus forms the additional paid-in capital.
- Common Stock Account: Also referred to as the share capital account, represents the nominal value of issued shares.
- Additional Paid-in Capital Account: Known as the share premium account, this includes the extra amount paid over the par value.
Real-World Example of Contributed Capital
Consider a scenario where a company issues 5,000 shares with a par value of $1 each. Investors pay $10 per share, raising equity capital of $50,000. Consequently, the company records $5,000 in the common stock account and $45,000 in the paid-in capital in excess of par. The combined total, i.e., the contributed capital, sums to $50,000.
Related Terms: Paid-in Capital, Common Stock, Additional Paid-in Capital, Equity Financing, Share Premium, Initial Public Offering (IPO)
