Contributed Capital

What Is Contributed Capital?

Contributed capital, also known as paid-in capital, is the cash and other
assets that shareholders have given a company in exchange for stock.
Investors make capital contributions when a company issues equity shares
based on a price that shareholders are willing to pay for them. The total
amount of contributed capital or paid-in-capital represents their stake or
ownership in the company.

Contributed capital may also refer to a company's balance sheet item listed

under stockholders' equity, often shown alongside the balance sheet entry for
additional paid-in capital.

Understanding Contributed Capital

Contributed capital is the total value of the stock that shareholders have
bought directly from the issuing company. It includes the money from initial
public offerings (IPOs), direct listings, direct public offerings, and secondary
offerings—including issues of preferred stock. It also includes the receipt of
fixed assets in exchange for stock and the reduction of a liability in exchange
for stock.

Contributed capital can be compared with additional paid-in capital, and the

difference between the two values will equal the premium paid by investors
over and above the par value of the company's shares. The par value is
merely an accounting value of each of the shares to be offered and is not
equivalent to the market value that investors are willing to pay.

 
When companies repurchase shares and return capital to shareholders, the
shares bought back are listed at their repurchase price, which reduces
shareholders' equity.

KEY TAKEAWAYS

 Contributed capital, also known as paid-in capital, is the cash and other
assets that shareholders have given a company in exchange for stock.
 This is the price that shareholders paid for their stake in the company.
  Contributed capital is reported in the shareholder’s equity section of the
balance sheet and usually split into two different accounts: common
stock and additional paid-in capital account.
Preferred shares sometimes have par values that are more than marginal,
but most common shares today have par values of just a few pennies.
Because of this, "additional paid-in capital" tends to be representative of the
total paid-in capital figure and is sometimes shown by itself on the balance
sheet.

Capital Contributions
It's important to distinguish that capital contributions, which are an injection of
cash into a company, can come in other forms besides the sale of equity
shares. For example, an owner might take out a loan and use the proceeds to
make a capital contribution to the company. Businesses can also receive
capital contributions in the form of non-cash assets such as buildings and
equipment. These scenarios are all types of capital contributions and
increase owners' equity. However, the term contributed capital is typically
reserved for the amount of money received from issuing shares and not other
forms of capital contributions.

Calculating Contributed Capital

Contributed capital is reported in the shareholder’s equity section of the
balance sheet and usually split into two different accounts: common stock
and additional paid-in capital account. In other words, contributed capital
includes the par value—or nominal value—of the stock, found in the common
stock account, and the amount of money over and above the par value that
shareholders were willing to pay for their shares—the share premium—found
in the additional paid-in capital account.

The common stock account is also known as share capital account, and the
additional paid-in capital account is also known as the share premium
account.

Example of Contributed Capital

For example, a company issues 5,000 $1 par value shares to investors. The
investors pay $10 a share, so the company raises $50,000 in equity capital.
As a result, the company records $5,000 to the common stock account and
$45,000 to the paid-in capital in excess of par. Both of these accounts added
together equal the total amount stockholders were willing to pay for their
shares. In other words, the contributed capital equals $50,000.