Contributed Capital, also known as Paid-in Capital and sometimes referred to as Surplus, represents the amount of funds that shareholders have invested into a company in exchange for equity, typically in the form of stock.
What is Contributed Capital?
Contributed Capital is a primary component of shareholders’ equity and includes the total value of cash and other assets that shareholders have directly contributed to a corporation in exchange for shares of stock. It is distinguished from retained earnings, which are the cumulative net earnings of a business that have not been distributed as dividends.
Types of Contributed Capital
- Common Stock: The value of the stock issued to common shareholders.
- Preferred Stock: The value of stock issued to preferred shareholders, often with specific rights and privileges.
- Additional Paid-In Capital (APIC): The amount received from shareholders above the par value of the stock.
Historical Context
The concept of Contributed Capital has evolved over centuries, with the development of joint-stock companies in 16th-century England. These companies allowed investors to pool capital for large ventures, such as overseas trading expeditions. The notion of separating ownership (shareholders) from management (company directors) was formalized, leading to modern corporate structures.
Examples of Contributed Capital
Consider a company issuing 1,000 shares with a par value of $1 each, priced at $10 per share to investors. The Contributed Capital would be recorded as $1,000 in Common Stock and $9,000 in Additional Paid-In Capital.
1Journal Entry:
2Debit: Cash $10,000
3Credit: Common Stock $1,000 (1,000 shares × $1 par value)
4Credit: Additional Paid-In Capital $9,000 (1,000 shares × ($10 - $1))
Applicability in Financial Statements
Contributed Capital is reported on the balance sheet under shareholders’ equity. It provides insights into the amount of funding a company has secured through the sale of shares. This figure is essential for understanding the financial structure and health of the enterprise.
Related Terms
- Paid-in Capital: Paid-in Capital refers to the total amount of cash or other assets that shareholders have paid into the company in exchange for stock. It encompasses both the par value (stated value) of the stock and any additional amounts paid above par value, known as Additional Paid-In Capital.
- Surplus: Surplus typically refers to any amount above the par value of stock issued and is another term for Additional Paid-In Capital. It highlights the extra funds contributed by investors over the nominal value of the shares.
FAQs
How does Contributed Capital differ from Retained Earnings?
Why is Contributed Capital important?
Can Contributed Capital decrease?
Summary
Contributed Capital forms a crucial part of shareholders’ equity, providing a foundational measure of the capital investors put into a business in exchange for ownership. Understanding its structure, historical evolution, and impact is vital for assessing a company’s financial health and investment attractiveness.
References
- Brealey, R. A., Myers, S. C., & Allen, F. (2017). Principles of Corporate Finance.
- Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2019). Intermediate Accounting.
- Historical overview of corporate development and joint-stock companies from the 16th century.
By providing a comprehensive definition and context for Contributed Capital, this entry equips readers with the essential knowledge needed to understand its role in corporate finance and accounting.
