Contributed Capital - Explained
What is Contributed Capital?
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Table of ContentsWhat is Contributed Capital?How does Contributed Capital Work?Contributed Capital CalculationAcademic Research on Contributed Capital
What is Contributed Capital?
Contributed capital refers to the funds invested in a company by owners in exchange for company ownership (a number of a company's stock). Contributed capital is otherwise called paid-in-capital.
How does Contributed Capital Work?
On a company's balance sheet, contributed capital is an entry that reflects the amount of a company's stock that is shareholders have purchased. It also indicates the price shareholders have paid for their stake or position in the company. Contributed capital amounts to the total value of a company's stock that have been issued in exchange for cash or assets from shareholders. Money generated from Initial public offerings (IPOs), secondary offerings and direct public offerings make up the contributed capital. Contributed capital is not limited to cash paid by shareholders for stock, it includes the assets exchanged for stock.
Contributed Capital Calculation
When being reported in a company's balance sheet, contributed capital is categorized into two accounts; common stock amount and additional paid-in-capital account. The common stock account is otherwise called the share capital amount while the additional paid-in-capital account is known is the share premium account. These accounts are reported in the shareholders equity section. Reporting contributed capital entails the consideration of par value of stock and the amount over or above the part value that shareholders are willing to pay in exchange for the company's stock. Here is an example of contributed capital; Company A has 1000 shares to be issued to shareholders and sets $3 as the par value of each share. The shareholders are however willing to pay an amount over and above the par value, let's say $10. This means the company has been able to raise an additional $7 on each share. When reporting the contributed capital in its balance sheet, the total contributed capital is $10,000, but the company will record $3,000 in the common stock account and the remaining $7,000 in the additional paid-in capital account.