Contributed Capital

Definition

Contributed capital, also known as paid-in capital, refers to the amount of money or other assets that shareholders or owners have invested in a business. It represents the funds that have been contributed to the company by its owners or investors, and it is a critical component of a company's balance sheet.

5 Must Know Facts For Your Next Test

1. Contributed capital is reported on the balance sheet under the shareholders' equity section, and it represents the total amount of capital that has been invested in the company by its owners or shareholders.
2. Contributed capital can be increased through the issuance of new shares or the reinvestment of retained earnings, and it can be decreased through the repurchase or retirement of shares.
3. The par value of a share of stock is the minimum price at which a share can be issued, and the difference between the issue price and the par value is recorded as share premium.
4. Contributed capital is an important source of funding for a company, as it provides the company with the resources it needs to finance its operations and growth.
5. The balance sheet must maintain a balance between assets and liabilities, with contributed capital being a key component of the equity side of the balance sheet.

Review Questions

• Explain the role of contributed capital in the balance sheet and how it is related to a company's equity.
  • Contributed capital is a key component of a company's shareholders' equity on the balance sheet. It represents the total amount of capital that has been invested in the company by its owners or shareholders. Contributed capital is distinct from retained earnings, which are the profits that the company has earned and retained for future use. Together, contributed capital and retained earnings make up the total equity of the company, which represents the residual interest in the company's assets after deducting its liabilities.
• Describe the relationship between par value, share premium, and contributed capital, and how these elements impact the balance sheet.
  • The par value of a share of stock is the minimum price at which a share can be issued. When a company issues shares at a price above the par value, the difference between the issue price and the par value is recorded as share premium or additional paid-in capital. This share premium is added to the contributed capital account on the balance sheet, increasing the total amount of contributed capital. The balance sheet must maintain a balance between assets and liabilities, with contributed capital being a key component of the equity side of the balance sheet.
• Analyze how changes in contributed capital, such as the issuance of new shares or the repurchase of shares, can impact a company's financial position and the balance sheet.
  • Increases in contributed capital, such as through the issuance of new shares, provide the company with additional resources to finance its operations and growth. This can strengthen the company's financial position and increase its ability to invest in assets and fund its activities. Conversely, decreases in contributed capital, such as through the repurchase or retirement of shares, can reduce the company's equity and potentially impact its financial ratios and creditworthiness. These changes in contributed capital must be carefully managed and reflected on the company's balance sheet to maintain a balanced and accurate representation of the company's financial position.

Related terms

Equity:

Equity represents the residual interest in the assets of a company after deducting its liabilities. It includes contributed capital as well as retained earnings.

Par Value: The par value is the nominal or face value of a share of stock, as determined by the company's charter. It is the minimum price at which a share can be issued.

Share Premium: Share premium, also known as additional paid-in capital, is the amount a company receives for its shares that is in excess of the par value of those shares.