What Is Contributed Capital?
The cash and other assets that shareholders have provided a corporation for stock are referred to as contributed capital, also known as paid-in capital. When a corporation offers equity shares at a price that shareholders will pay, investors make capital contributions. Their position or ownership in the company is represented by the total amount of contributed capital or paid-in capital.
Contributed capital can also refer to the stockholders’ equity item on a company’s balance sheet, which is commonly displayed alongside the balance sheet entry for additional paid-in capital.
Understanding Contributed Capital
The total value of the stock that shareholders have purchased directly from the issuing business is referred to as contributed capital. It covers funds raised through initial public offerings (IPOs), direct listings, direct public offerings, and secondary offerings, such as preferred stock issues. Receiving fixed assets in return for stock and reducing liabilities in exchange for shares are also included.
The difference between the two values equals the premium paid by investors over and above the par value of the company’s shares. Contributed capital can be compared to additional paid-in capital, and the difference between the two values equals the premium paid by investors over and above the par value of the company’s shares. The par value is an accounting value for each of the shares to be offered, not a market value that investors are ready to pay.
Preferred shares have more than marginal par prices, but most common shares today have par values of just a few pennies. As a result, “additional paid-in capital” tends to be reflective of total paid-in capital and is occasionally shown on the balance sheet by itself.
It’s important to note that capital contributions, which are cash injections into a business, can take many other forms other than the selling of stock shares. An owner might, for example, take out a loan and use the proceeds to make a capital contribution to the business. Non-cash assets such as buildings and equipment, can also be used to make capital contributions to businesses. These scenarios include a variety of capital inputs that improve the equity of the owners. However, the term “contributed capital” is usually used to refer to the money obtained from the sale of stock rather than other types of capital contributions.
Calculating Contributed Capital
Contributed capital is recorded in the shareholder’s equity portion of the balance sheet and is often divided into two accounts: common stock and additional paid-in capital. In other words, contributed capital includes the stock’s par value—or nominal value—found in the common stock account, as well as the amount of money paid for shares over and above the par value—the share premium—found in the additional paid-in capital account.
The additional paid-in capital account is also known as the share premium account, while the common stock account is also known as the share capital account.
Example of Contributed Capital
A firm, for example, may issue 5,000 shares with a par value of $1 to investors. The investors pay $10 per share, resulting in a $50,000 equity capital rising. As a result, the corporation accounts for $5,000 in common stock and $45,000 in paid-in capital in excess of par. The total amount stockholders were willing to pay for their shares are equal to the sum of these two accounts. To put it another way, the provided capital is $50,000.
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