What is 'Contributed Capital'
Contributed capital is an entry on the shareholders' equity section of a company's balance sheet that summarizes the total value of stock that shareholders have directly purchased from the issuing company. Contributed capital is calculated by adding the par value of the shares to the value paid that was greater than par value. Shares that investors purchased from the secondary markets are not incorporated into the contributed capital, but shares sold as a result of a secondary offering would count, as the proceeds of these shares go directly to the issuing company.
BREAKING DOWN 'Contributed Capital'Nonprofits rely on contributions from donors, and companies rely on capital investment from investors. While it may sound like "contributed capital" refers to a contribution or donation to a nonprofit, it actually refers to the cash investors give companies in exchange for stock or equity.
Contributed Capital Calculation
There are two ways for investors to invest in a company: through debt or through equity. Debt is recorded on the company's balance sheet under liabilities. Equity is also recorded on the balance sheet, but equity is recorded in a section referred to as stockholders' equity – and contributed capital is a part of this section. When an investor buys a stock, the company records a debit to the cash account for the amount of cash received in the transaction. The account that is credited with this cash is contributed capital, also referred to as paid-in capital on the balance sheet.
The formula for contributed capital is par value plus additional paid-in capital. In other words, contributed capital includes the par value of the stock and the additional amount paid over par value, referred to as paid-in capital.
Contributed Capital Considerations
This is not the only transaction that finds its way into the contributed capital account. The contributed capital account is also credited with cash from the receipt of fixed assets in exchange for stock or the reduction of a debt in exchange for stock. In other words, if the company pays for assets and eliminates debt in exchange for stock, it is recorded in this line item. The only caveat is that the shares must be purchased directly from the company in the form of an initial public offering (IPO) or a secondary IPO. The company does not receive cash when shares of its stock are traded on the exchange. The value of these shares goes up in value, but that increase in market value is not recorded to cash. Contributed capital can also include preferred stock.