Invested Funds: Meaning, Method of Calculation, Illustration
What in the World is Contributed Capital?
Contributed capital, also famously known as moolah pumped in, represents the sum of cash and assets investors pour into a business when purchasing its shares. This funds injection establishes the shares these investors own, granting them a stake in the company. The invested money is collectively referred to as a shareholder's contribution.
Contributed Capital, Explained
When investors buy shares from a company, they contribute real cash or valuable assets to the company. This transaction is what makes up contributed capital—the price they paid for that stake in the company. Contributed capital is a crucial part of stockholders' equity and can be found on the balance sheet. It breaks down into two main components: common stock and additional paid-in capital, also known as extra moolah thrown in. If the company issues preferred stocks, these will also reside in the contributed capital section of the balance sheet.
Key Points to Remember
- When investors buy shares from a company, they shell out both cash and assets that later become part of the contributed capital.
- Contributed capital serves as the price shareholders paid for their part in the company.
- On the balance sheet, contributed capital will be recorded under the shareholders' equity section, typically allocated between common stock and additional paid-in capital accounts.
Unraveling Contributed Capital
Contributed capital consists of the money investors spend on shares obtained from initial public offerings (IPOs), direct listings, direct public offerings, and secondary offerings—including preferred stock issues. It also includes the exchange of fixed assets for stock and the settlement of liabilities in exchange for stock.
Common stock can be compared with additional paid-in capital. The difference between these two values calculates the premium paid by investors over and beyond the face value of the company's shares. Common stock is noted at a predetermined amount called the 'face value'. This figure is merely an accounting value for each share offered and doesn't match the market value investors are ready to pay.
Capital Contributions
It's worth noting that capital contributions—which are injections of cash into a business—can come in various forms other than the sale of equity shares. For example, an owner can take out a loan and use the proceeds to contribute capital to the company. Businesses can also receive capital contributions in the form of non-cash assets such as buildings and equipment. These situations are all examples of capital contributions that boost the owners' equity. However, the term contributed capital typically applies to the money raised from issuing shares and not other types of capital contributions.
Gotcha!
When companies repurchase shares and return capital to shareholders, the shares bought back are listed at their repurchase price, which reduces shareholders' equity.
Crunching Numbers: Calculating Contributed Capital
Contributed capital is listed on the shareholders' equity section of the balance sheet and is usually split into two different accounts: common stock and additional paid-in capital account. In other words, contributed capital encompasses the par value (or nominal value) of the stock, found in the common stock account, and the amount of money investors were willing to pay over the par value for their shares, known as the premium, found in the additional paid-in capital account.
The common stock account is also called the share capital account, and the additional paid-in capital account is known as the share premium account.
Example in Action: Contributed Capital
For instance, if a company issues 10,000 $2 par value shares to investors and they pay $50 a share, the company raises $500,000 in equity capital. In this scenario, the company records $200,000 to the common stock account (par value of the shares issued) and $300,000 to the additional paid-in capital account (the amount paid above par value). Both accounts combined equal the total amount investors paid for their shares, making up the contributed capital, which in this case amounts to $500,000.
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Fascinating Facts
- Paid-In Capital is often used interchangeably with contributed capital, but it specifically denotes the total capital received from shareholders in exchange for stock, including both the par value and the amounts paid above par.
- Additional Paid-In Capital (APIC) is the amount paid by investors over the par value of the stock issued. This account records the excess payment over the stock's nominal par value and is often sizable as par values are typically relatively low.
- The price investors pay for shares in a company contributes to the company's contributed capital, which is a part of stockholders' equity.
- Capital contributions can come in various forms, such as investors buying shares in Initial Public Offerings (IPOs), direct listings, or secondary offerings, or by exchanging fixed assets for stock or settling liabilities in exchange for stock.
- Contributed capital is typically allocated between two main accounts on the balance sheet: common stock and additional paid-in capital, also known as "extra moolah thrown in".
- When calculating the premium paid by investors, the difference between common stock and additional paid-in capital values can be used, which represents the face value of the company's shares.
