Contributed CapitalDefined with Examples

Written By:
Adiste Mae

What is Contributed Capital?

Contributed Capital is the total amount that investors pay for shares of stock in a company.

It is also known as Paid-In Capital, referring to the cash and other assets that companies receive in exchange for stocks of the company.

When companies issue equity shares, investors make capital contributions by acquiring these equity shares at a price that they are willing to pay.

In the Balance Sheet, Contributed Capital is considered as the one listed in the Owner’s Equity section alongside Additional Paid-In Capital.

Understanding Contributed Capital

The Contributed Capital refers to the total value of a company’s equity which contains money from the purchase of shares of stocks from an issuing company’s IPO (Initial Public Offering), direct listings, direct public offerings and from secondary offerings.

The Contributed Capital amount includes the par value of the stocks purchased plus the premium amount (Additional Paid-In Capital).

When stocks are issued, investors typically pay for it with cash but other considerations in exchange for shares of stocks can also be fixed assets or reduce liability for a stock.

When presented in the Balance Sheet, companies can either present Contributed Capital as a single account under the Stockholders Equity section, or they can split it into two – Common Stock and Additional Paid-In Capital.

Stocks issued and paid for at par value are recorded under Common Stock and any excess amount paid is recorded under Additional Paid-In Capital.

Capital Contributions

To distinguish contributed capital and capital contributions, it is important to determine the manner in which an investor acquires their stake in the company.

Contributed Capital only refers to the shares that are bought directly from the company through an Initial Public Offering (IPO) or through a secondary issuance of stocks.

Capital Contributions on the other hand, is one way of bringing in cash to the company but in all other forms apart from the sale of equity shares such as receipt of capital contributions in the form of non-cash assets or when owners of the company take out loans in order to create capital contributions to the company.

Regardless of the method in which capital contributions are made, they increase the owner’s equity.

Calculating Contributed Capital

Contributed Capital is presented in the Balance Sheet as two separate accounts in the Shareholders Equity section – Common Stock and Additional Paid-In Capital.

Common Stock is also referred to as share capital (the total amount of shares issued computed at its par value) while Additional Paid-In Capital is also known as share premium account (paid-in capital in excess of par).

Example of Contributed Capital

A company issues 1,000 $3 par value shares. An investor has paid $20,000 for all 1,000 shares issued.

When the company records this, it will be $3,000 towards the Common Stock account and $17,000 towards Additional Paid-In Capital.

The journal entry to record the issuance of common shares will be:

The total contributed capital is therefore $20,000 ($3,000 + $17,000) which is the total amount that investors are willing to pay for the shares issued.