What Is Contributed Capital?
Let me explain contributed capital to you directly: it's also called paid-in capital, and it refers to the funds that shareholders give to a company in exchange for equity. When a company issues shares, investors contribute based on the price they're willing to pay, and the total contributed capital shows their ownership stake in the business.
You'll find contributed capital as part of stockholders' equity on the balance sheet. It includes common stock and additional paid-in capital, sometimes known as contributed surplus. If the company has preferred stocks, those are included here too, all under contributed capital.
Key Takeaways
- When investors buy shares from a company, they put in money and assets that become part of contributed capital.
- This is the price that shareholders paid for their stake in the company.
- Contributed capital is reported in the shareholders' equity section of the balance sheet and is usually split into two different accounts: common stock and additional paid-in capital account.
Understanding Contributed Capital
Contributed capital is the total value of stock that shareholders have bought directly from the issuing company. This covers money from initial public offerings (IPOs), direct listings, direct public offerings, and secondary offerings, including preferred stock issues. It also includes receiving fixed assets in exchange for stock or reducing a liability for stock.
You can compare common stock with additional paid-in capital, and the difference shows the premium investors paid over the par value of the shares. Common stock is recorded at its par value, which is just an accounting figure for each share, not the actual market value investors pay.
Capital Contributions
I need to point out that capital contributions, which inject cash into a company, aren't limited to selling equity shares. For instance, an owner could take a loan and use it to contribute capital, or the business might receive non-cash assets like buildings or equipment. These all increase owners' equity, but the term contributed capital specifically means money from issuing shares, not these other forms.
Important Note on Share Repurchases
When companies repurchase shares and return capital to shareholders, those bought-back shares are listed at their repurchase price, which reduces shareholders' equity.
Calculating Contributed Capital
Contributed capital shows up in the shareholders’ equity section of the balance sheet, typically divided into common stock and additional paid-in capital accounts. Essentially, it includes the par value of the stock in the common stock account and the extra amount shareholders paid above par in the additional paid-in capital account.
The common stock account is also called the share capital account, and additional paid-in capital is known as the share premium account.
Example of Contributed Capital
Consider this example: a company issues 5,000 shares with a $1 par value to investors who pay $10 per share, raising $50,000 in equity. The company records $5,000 in the common stock account and $45,000 in paid-in capital in excess of par. Together, these make up the $50,000 contributed capital, which is what stockholders paid for their shares.
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