People have many ways to earn stocks. Aside from cash, they can also offer companies other types of assets in exchange for stocks. But whatever it is that earned the person a stock, we call it a contributed capital. It is also popularly known as “paid-in capital.” These contributions from investors are made when companies issue equity shares depending on a price that shareholders are ready to pay. Hence, the total amount of that contributed capital is also the investor’s stake or ownership in that company. In another scenario, contributed capital can also be about a company’s balance sheet item, the stockholder’s equity list. We can often encounter it beside the balance sheet entry for additional paid-in capital.
Tell me more about contributed capital.
The stock’s total value bought by the shareholders directly from the issuing company is called contribution capital. It may be in different forms like money, direct listings or public offerings, and even secondary offerings. And when we say money, it can be from IPOs or initial public offerings. And when we say secondary offerings, we refer to preferred stock issues. We can also add this to the list: fixed asset receipts and liability reduction in exchange for stocks. As we have said, it comes in different forms.
Now, we mentioned paid-in capital earlier. What does it mean? We said it because it is comparable to contributed capital. The difference between one value to another is the premium that investors paid. It is also over and above the company shares’ par value. If this is your first time encountering the term par value, it refers to a mere accounting value of every share to be offered. Note that this is not similar with the market value that investors are ready to pay.
Sometimes, companies repurchase shares. Then, they return the capital to the shareholders. How much did they repurchase them? They are at a repurchase price on the list, and this lessens the equity of a shareholder. Sometimes, preferred shares have par values beyond marginal. However, the most usual shares have par values with minimal amounts. Hence, “additional paid-in capital” somehow represents the total paid-in capital figure. There are also times that it is visible on the balance sheet.
Contributed capital and capital contributions
These two might sound pretty similar but note that capital distributions refer to the cash injected into companies. We can encounter them besides equity shares sales, and they can come in various forms. Let us say that you took a loan to make a capital contribution to Company A. You can give capital distributions other than cash. They can also be other assets like buildings or equipment. Nevertheless, these are all acceptable as capital distributions, and they can increase the owner’s equity. On the other hand, contributed capital is a different term, as we have explained earlier. It is most likely reserved for the money received from the share issuance. It does not come in any other form of capital contributions.
Let us calculate
Before we end our topic, you need to know that we can see the contributed capital in a report. We can find the report on the balance sheet’s equity section. It is typically divided into two accounts which are common stock account and additional paid-in capital account. In a nutshell, contributed capital comprises the par value of the stock, which we can find in the common stock account and the money over and above that par value. Shareholders are ready to pay for their shares (share premium) that we can find in the additional paid-in account. Hence, common stock account and additional paid-in account are also known as share capital account and share premium account, respectively.