Definition of Contributed Capital
Contributed capital is one of the major components of a corporation's stockholders' equity. Contributed capital is often described as paid-in capital and as corporation's permanent capital.
Typically, a corporation issues shares of its common stock and receives cash for the stock's fair market value. The transaction will be recorded with a debit to the Cash account and a credit to one or two contributed capital accounts such as Common Stock (and perhaps Paid-in Capital in Excess of Par Value). If the corporation exchanges some of its shares of common stock for property, the fair market value of the stock or the property (whichever is more clear) is debited to the property account and credited to one or two contributed capital accounts.
Note that both the corporation's assets increased and its stockholders' equity (specifically the contributed capital) increased.
Example of Contributed Capital
Assume a corporation issued and sold 10,000 new shares of its common stock for $900,000. The money received by the corporation is debited to the current asset Cash and $900,000 is credited to a contributed capital account such as Common Stock.
Assume that two days later the corporation purchases real estate consisting of land and a warehouse/office building for $700,000. Assume that the land is appraised to be 1/7 of the real estate cost. After the real estate purchase, the corporation's general ledger accounts will have a debit balance of $200,000 in the current asset account Cash, a debit balance of $100,000 in the noncurrent asset account Land, a debit balance of $600,000 in the noncurrent asset account Warehouse/Office Building, and a $900,000 credit balance in the contributed capital account Common Stock.
After several accounting periods, the amounts in the asset accounts will change from the depreciation of the building and from hundreds of other transactions. However, the amount in the Common Stock account will normally remain at $900,000.
Sure, Contributed Capital refers to the funds raised by a corporation through the issuance of its stock, typically common stock, where shareholders invest money directly into the company. This capital is a key component of a company's equity, representing the permanent investment made by shareholders. As an enthusiast in accounting and finance, I've encountered numerous instances where contributed capital plays a crucial role in a company's financial structure.
When a corporation issues shares of common stock, it receives cash equal to the fair market value of the stock issued. This transaction is recorded by debiting the Cash account and crediting one or two contributed capital accounts, such as Common Stock or Paid-in Capital in Excess of Par Value. This process showcases how the company raises funds by essentially selling ownership stakes to investors.
Moreover, if a corporation exchanges its shares for property instead of cash, the fair market value of the stock or the property is recorded similarly, debiting the property account and crediting the contributed capital accounts. This illustrates the flexibility of contributed capital accounting in incorporating non-cash assets into the company's equity structure.
An example provided outlines how contributed capital is affected by different transactions. For instance, when a corporation issues and sells 10,000 new shares of common stock for $900,000, the cash received is debited into the Cash account, while $900,000 is credited to the contributed capital account, such as Common Stock. This directly impacts the balance sheet by increasing cash on one side and contributed capital on the other.
Similarly, when the corporation purchases real estate (land and a building) for $700,000, the corresponding entries affect the asset accounts for Cash, Land, and the Warehouse/Office Building. However, the contributed capital account, Common Stock in this case, remains unchanged at $900,000. This highlights the stability of contributed capital even as other asset accounts fluctuate due to various transactions and depreciation.
This stability in contributed capital at $900,000 over multiple accounting periods showcases its nature as a permanent investment by shareholders. Despite fluctuations in other accounts due to depreciation or other transactions, the contributed capital typically remains constant unless further stock issuances or significant changes occur.
Understanding these nuances of contributed capital and its accounting treatment is vital for comprehending a company's financial health, equity structure, and the impact of various transactions on its balance sheet.
