Contributed capital is an element of the total amount of equity recorded by an organization. It can be a separate account within the stockholders' equity section of the balance sheet, or it can be split between an additional paid-in capital account and a common stock account (where the par value of the shares sold is recorded in the common stock account and any excess payments are recorded in the additional paid in capital account), which are also within the stockholders' equity section of the balance sheet.
It is customary for investors to concentrate their attention on the net amount of total equity, rather than this single element of equity. Thus, the recordation of contributed capital is designed to fulfill a legal or accounting requirement, rather than providing additional useful information.
When an investor pays a company for shares of its stock, the typical journal entry is for the company to debit the cash account for the amount of cash received and to credit the contributed capital account. There are other possible transactions involving increases in contributed capital, of which the following are the most common:
- Receive cash for stock. Debit the cash account and credit the contributed capital account.
- Receive fixed assets for stock. Debit the relevant fixed asset account and credit the contributed capital account.
- Reduce a liability for stock. Debit the relevant liability account and credit the contributed capital account.
The term contributed capital only refers to shares that investors have bought directly from the company, either from an initial public offering or a secondary issuance of stock; there is no accounting entry for shares that are exchanged between investors on the open market, since the company receives no cash from these transactions.
Despite the name, contributed capital does not refer in any way to funds contributed to a nonprofit entity. A nonprofit has no stockholders' equity, so there is no way to acquire an equity position in such an organization.
Contributed capital is also known as paid-in capital.