What is contributed capital (paid‑in capital)?
– Contributed capital is the portion of owners’ equity that comes from investors when they buy a company’s shares directly from the issuer. It records the cash and other assets a firm receives in exchange for issuing stock, and it sits in the shareholders’ equity section of the balance sheet.
Key terms (defined on first use)
– Par value: a nominal dollar amount assigned to each share for accounting purposes; it usually bears little relation to market price.
– Additional paid‑in capital (APIC) or share premium: the amount investors pay per share above par value.
– Paid‑in capital: another name for contributed capital when it refers to funds received from issuing shares.
– Capital contribution: any injection of resources into a company by owners; not all contributions are recorded as contributed capital (see below).
How contributed capital is presented
– On the balance sheet, contributed capital is typically split into two accounts:
1) Common stock (or preferred stock) recorded at par value; and
2) Additional paid‑in capital (APIC) showing the excess investors paid over par.
– The sum of these two accounts equals the total contributed capital from share issuances.
What counts (and what doesn’t)
– Included: proceeds from primary equity issuances (IPOs, follow‑on offerings, private placements), non‑cash assets received in exchange for stock, and liability reductions settled by issuing stock.
– Excluded (usually): general owner loans or transfers recorded as owner contributions unless the company records them as share issuances. The term “contributed capital” is most often used specifically for money received from issuing shares.
– Share repurchases reduce shareholders’ equity by the repurchase price; treasury stock is presented as a reduction of equity.
How to calculate contributed capital — step‑by‑step checklist
1. Find the number of shares issued and the par value per share (balance sheet or equity footnote).
2. Identify the issue price per share (from the offering documents or notes).
3. Compute Common stock at par = number of shares × par value.
4. Compute Additional paid‑in capital = number of shares × (issue price − par value).
5. Add the two amounts: Contributed capital = Common stock at par + APIC.
6. Adjust for preferred stock if applicable (calculate par and APIC for preferred shares and include them).
7. Note any issuance costs: offering costs may be netted against APIC per accounting rules.
Simple numeric example (worked)
Assumptions: company issues 5,000 common shares, par value $1.00, investors pay $10.00 per share. No issuance costs.
1. Common stock at par = 5,000 shares × $1.00 = $5,000.
2. APIC = 5,000 × ($10.00 − $1.00) = 5,000 × $9.00 = $45,000.
3. Contributed capital = $5,000 + $45,000 = $50,000.
Typical journal entry at issuance (simplified)
– Debit: Cash $50,000
– Credit: Common stock (par) $5,000
– Credit: Additional paid‑in capital $45,000
Notes and assumptions
– This example assumes no issuance fees or discounts. Real offerings often incur underwriting fees or legal costs that reduce net proceeds and are treated in equity accounting (commonly deducted from APIC).
– For preferred stock or other equity instruments, apply the same par/APIC split logic.
Practical checklist for reading financial statements
– Locate the shareholders’ equity section and the footnotes that describe share issuances.
– Verify number of shares issued vs. authorized and outstanding.
– Check par value per share and compute whether APIC matches the reported figures.
– Look for notes on non‑cash contributions (assets or liability settlements) recorded as equity.
– If treasury stock or repurchases exist, confirm how they affect total equity.
Sources for further reading
– Investopedia — Contributed Capital: https://www.investopedia.com/terms/c/contributed-capital.asp
– Corporate Finance Institute — Paid‑in Capital (Contributed Capital): https://corporatefinanceinstitute.com/resources/knowledge/accounting/paid-in-capital/
– U.S. Securities and Exchange Commission — How to Read a Balance Sheet (Investor.gov): https://www.investor.gov/introduction-investing/investing-basics/how-read-financial-statements
– Financial Accounting Standards Board (FASB): https://www.fasb.org/
Educational disclaimer
This explainer is for educational purposes only and does not constitute individualized investment or accounting advice. For specific accounting treatment or investment decisions, consult a licensed accountant, auditor, or financial professional.