What is Contributed Capital?
Definition: Contributed capital is the total amount of funds that a company receives from its investors; part is recorded as par value stock while the other part is recorded as Paid In Capital.
Have you ever wondered how do investors retain their shareholding or ownership as company partners? It is through their contributed capital. They must have cash or assets and they them to the company to receive stock.
However, the contributed capital also commonly identified as paid-in capital may also be a balance sheet item usually created or built from a shareholder’s equity. In this case, it can be in two parts; as a common stock account or as an additional paid-in capital account. Nonetheless, there is a slight difference between paid-in capital and additional paid-in capital.
While the former has the inclusion of par value of stock sold, the latter symbolizes the price at which stock was retailed over and above the par value. Besides it is worth noting that the funds derived from operations carried out by investors particularly in secondary markets do not account for contributed capital.
Contributed Capital Example
XYC Company issued its stakeholders $10,000 $1 par value shares. In return, he paid $20 per share resulting in $200,000 of equity capital the company raised. The company would thereafter record $50,000 for common stock and $150,000 as paid-in capital over and above the par.
The Total in these two accounts shows the amounts the investors would have to pay to get shares from the company. The mounts also explain the concept of the contributed capital, which equaled to $200,000.
Paid In Capital vs Earned Capital – What’s the Difference?
Yes. Here is the difference. As previously mentioned, paid-in capital is purely a contribution from an investor. On the other hand, what the company brings in as net income is referred to as earned capital and must not include dividends.
Contributed Capital Formula Components
Meanwhile, there are other components, which keep a business running include:
Net Income: This is the revenue a company raised from its operations and is usually or should be more than the costs it incurred. In normal circumstances it is accounted for in certain periods; say a month or a quarter and in the long – term, a year is applicable. The net income is distributed to Shareholders receive part of the net income.
Financing assets: Every business regardless of the industry requires things such as machinery, equipment, and inventory among others. However, you may need financing to finance some of these things. Apart from financial institutions, other major sources of financing are the investors and that is how they acquire a shareholding and equity in the business.
How to Increase Contributed Capital
Every time an investor acquires shares from a company, they are recorded in the balance sheet as paid-in capital. Can an investor increase their shares? Yes. They can and there are several means of doing so.
Issuance of Preferred Shares: – This happens when a company is not in a position to issue additional common stock perhaps because the market is not doing well. Thus, the equity value is not strong. Consequently, the issuance of preferred shares is likely to increase the paid-in capital.
Issuance of New Shares: – Shares are issues to investors during the founding of a company. The investors purchase common class stock shares, which are entered as a new journal and recorded at par value. However, the company may also decide to seek more financing for a new project hence they put new shares on sale for investors. At this point, a new journal is opened and adjusted upwards to accommodate the new shares in the balance sheet. The new shares increase the aid-in capital in the balance sheet.
Capital Structure: – Differences between equity and debt are likely to influence the status of the capital structure. However, when optimal structure increases more than the capital structure, debt financing is affected which in return affects common and preferred shares. In the long run, the total paid-in capital is also impacted.