Posted in Finance, Accounting and Economics Terms, Total Reads: 308
Definition: Contributed Capital
Contributed Capital, also known as Paid-In capital, is a part of stockholder’s equity in the balance sheet under ‘Liabilities and Shareholder’s Equity’. It is the amount of capital generated by the shareholders purchasing the stock directly from the issuing company (i.e. the primary market) and not in an open market from other stockholders (i.e. the secondary market).
Contributed capital is the aggregate amount of capital invested by all shareholders and not any specific investor. When the investors buy stock directly from the company (example: during an Initial Public Offering: IPO of the company), the corporation receives and keeps the capital funds as the paid in capital. The attention is not much concentrated on the contributed capital because it just forms a part of the shareholders’ equity and is not the equity in itself. Thus it is basically used for legal and accounting purpose rather than conveying any important information.
Contributed Capital can be further divided into two components:
a. Capital Stock: It represents the par or the stated value of the issued shares of the company. It includes the value of both the common stock and preferred stock.
b. Additional Paid In capital: The money paid over and above the par value of the stock purchased is called the paid in capital.
Example: Say Mr. X buys 5,000 shares of a company Y. The par value of a share of Y is $10. But the shares were issued at a price of $15. Thus the journal entry of the Contributed Capital can be represented as:
Additional Paid In capital
Common Stock value = number of shares*par value = 5,000*10 = $50,000
Additional Paid In capital = number of shares * (excess value over par value)