What is Contributed Capital?

What is Contributed Capital?

Definition

Contributed capital is the sum that shareholders have paid to acquire equity in a company. This consists of the par value of the shares and the amount in excess of this value, which is recorded as additional paid-in capital. The total of these two sums is the contributed capital.

What does contributed capital mean?

Contributed capital is the equity investment made by shareholders in a company. Stock can be purchased by paying cash or by contributing fixed assets. It is also possible to acquire stock in exchange for a reduction in debt. Each of these will result in an increase in the stockholder’s equity.

Can the sum that is used for buying a company’s shares on the stock exchange also be regarded as contributed capital? Remember that this type of transaction is essentially between two investors. It does not have any effect on the company’s balance sheet. Hence, the amount will not be regarded as contributed capital.

To qualify as contributed capital, the amount must be paid directly to the company in exchange for the issue of shares. The share issue could be an initial public offering or a subsequent issue of stock.

Another point to remember about contributed capital is that it is restricted to the sums paid by investors to buy equity in the company. Retained earnings, which are the net profits of a company that have not been distributed as a dividend, do not form part of the contributed capital.

Example of contributed capital

Many companies issue shares at a very low par value. For example, the par value of Apple Inc.’s stock is only $0.00001. Microsoft’s common stock has a par value of $0.001. At the time of Apple’s IPO in 1980, the stock was issued at $22. Microsoft’s equity issue back in 1986 was made at a price of $21.

In fact, most stocks have a low or non-existent par value. Consequently, the sum collected at the time of the IPO goes towards increasing the additional paid-in capital amount. Hence, the contributed capital of a company consists primarily of the money collected towards the  additional paid-in capital.

Summary

Contributed capital is the amount that has been paid by shareholders to purchase a company’s stock.