What is Contributed Capital in Excess of Par?

//What is Contributed Capital in Excess of Par?
What is Contributed Capital in Excess of Par? 2017-10-02T03:09:01+00:00

Definition: Contributed capital in excess of par, also called paid-in capital in excess of par, is the amount of cash or other assets over the par value of stock that shareholders paid the corporation in exchange for stock. In other words, this is the amount of money that shareholders were willing to pay above and beyond the par value for their ownership stake in the company.

What Does Contributed Capital in Excess of Par Mean?

These excess payments are reported on the balance sheet as one component of contributed capital–the other component being common stock. 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.

Example

For example, a company issues 1,000 $1 par value shares to investors. Since the company is growing and has a good possibility of being bought out in the near future, investors are willing to pay $10,000 for these shares. 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 that stockholders were willing to pay for their shares. In other words, the total contributed capital equals $10,000.

It’s important to note that corporations only record paid-in capital in excess of par 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 because the company doesn’t receive any assets from transactions between individual investors.

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.