Contributed capital is the amount of money shareholders have invested in the company in exchange for ownership rights. It is also called paid-in capital or shares capital. It is recorded on the balance sheet as the first line item under the owner’s equity section.
Common stocks issued and premiums paid for these stocks combined to make the total contributed capital. Both items are recorded at book values and can differ significantly from the market values.
What is Contributed Capital?
Contributed capital refers to the cash paid-in by the shareholders when they buy shares of a company. However, technically it can take several other forms such as transferring ownership of assets, land, property, or equipment to the company. It comprises two components; paid-in capital and share premium.
Common stocks and preferred stocks are recorded at the face or par values in the books. At the time of issuing these stocks, investors are ready to pay a premium above the par values. The premium paid is called the share premium. The amount equivalent to face values or par share prices is recorded as common equity. The total of these makes the total contributed capital.
Contributed or paid-in capital comes in the form of IPO, DPO, listings, and Rights Issue. Either way, shares are issued to raise capital from the market. Capital contributions can also be received in the form of non-cash items such as land, property, or equipment. However, non-cash items as contributed capital are uncommon.
How Contributed Capital is Calculated?
It comprises two segments; common stocks and share premium. Common stocks are issued with face value and are recorded in the books at the same prices. Investors paying an additional premium above the face or par value of these shares are recorded as a share premium. The total of these two figures gives the contributed capital figure.
For example, a company Green Star Co. Issues 100,000 ordinary shares with a nominal par value of $ 0.50. The market value of the shares comes to be $ 7.0 on the first day. Suppose all shares are subscribed. The company will receive a total of $700,000. The common stocks would be recorded at a book value of $ 50,000 and the share premium will be recorded as $ 650,000.
Real-World Example
Following is an excerpt of the balance sheet of Walmart from its latest balance sheet for the year ended March 31, 2021.
Source: stock.walmart.com
The common stock figure for Walmart stands at $ 282 million. Share premium equals $ 3,646 million. Hence, its total contributed capital is $ 3,928 million.
Special Considerations with Contributed Capital
Continuing with our example above, we can see line items such as retained earnings and comprehensive other items in the owner’s equity section. Although these two items are part of the owner’s equity, they are not included in contributed capital. Both of these items come through profits (or losses) earned by the company over the years.
Stocks once issued by a company can be traded several times a day. Share prices also fluctuate with unlimited changes. However, it does not change as it is recorded at book values. Also, selling or buying shares on the stock exchange does not affect contributed capital. Unless of course, the company issues new shares or buys back issued shares from shareholders.
Preferred shares are also part of contributed capital. Preferred shares are also recorded on their par or face value in the balance sheet. Normally, preferred shares are issued at a nominal value such as $1.0 as compared to common stocks that are issued at a fraction of a dollar price. Investors pay an additional premium to preferred stocks as well. Both of these figures are also included in the contributed capital.
A company buying back stocks will reduce its contributed capital. However, the reduction will only be recorded if the company permanently retires the recalled stocks.
Pros and Cons of Contributed Capital
It is the basic form of equity financing for any company. It comes with its pros and cons for the company.
Pros of Contributed Capital Include:
- It is a permanent source of financing for the company.
- Return in the form of dividends is not a legal obligation.
- The company does not require collateral to raise capital through equity.
- The company can utilize funds as and wherever it wants.
Cons of Contributed Capital Include:
- It dilutes the existing shareholders’ stakes.
- The cost of equity is always higher than debt financing.
- There are no guaranteed returns for investors as well as the company.
Conclusion
Contributed capital is the sum of common stocks at book value and the premium paid by shareholders. It is recorded on the balance sheet under the owner’s equity section. It is one of the basic sources of equity financing for a company.
