Definition: Contributed capital, also called paid-in capital, is the amount of cash and other assets that shareholders have given to the corporation in exchange for stock. In other words, this is the price that shareholders paid for their ownership stake in the company.
What Does Contributed Capital Mean?
Contributed capital is reported on the equity section of the balance sheet and usually split into two different accounts: common stock and paid-in capital in excess of par. The common stock account represents the total par value of all outstanding shares. The paid-in capital in excess of par account shows the amount of money over and above the par value that shareholders were willing to pay for their shares.
For example, a company issues 1,000 $1 par value shares to investors. The investors pay $10,000 for these shares because of the company prospects and change to increase their investments. The company would record $1,000 to the common stock account and $9,000 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 $10,000.
It’s important to note that the corporation only records paid in capital from investors when the shares are sold directly to investors. Corporations record contributed capital on initial public offerings and other stock issuances to the public. They do not, however, record any capital when stock is traded or bought and sold amongst investors. The general rule of thumb to remember is if the company isn’t receiving anything in the transaction, it isn’t recording any capital.
For example, Apple, Inc. shares are traded everyday on the open market between investors. Apple does not record any of these transactions because it doesn’t actually receive anything from investors. Only direct issuances from the company to investors are recorded on the books. Thus, the contributed capital reported on the balance sheet often doesn’t reflect the current market price of stock.