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Paid in Capital, Contributed Capital, and Stated Capital
Definitions, Meaning Explained, Examples

 

When investors buy shares of stock directly from the issuing company, funds paid in add to paid in capital, a component of Owners Equity on the Balance sheet.

Actual paid in capital for newly issued shares can be very different from stated par value for the same shares.

Paid in  capital (also called contributed capital) is a Balance sheet item, showing funds that stockholders have invested through purchase of stock from the issuing company.

When investors buy shares directly from the company, that is, the company receives and keeps the funds as contributed capital (paid in capital). When they buy shares on the open market, of course, funds go to the investor selling them.

Paid in Capital Adds to Owners Equity

Contributed (paid in capital) capital is one of the two main categories on the Balance sheet under owner’s equity (the other is retained earnings). Contributed capital, in turn, has two main components:

  • Stated capital, which is usually defined as the stated, or par value of the shares of stock that have been issued (the stated capital is listed on the Balance sheet below is the sum of values listed as "Preferred stock" and "Common stock.").
  • Additional paid-in capital, which represents money paid to the company above the par value.

Explaining Paid in Capital in Context

Sections below show how paid in capital items appear on the Balance Sheet. The creation of new paid in capital is explained in context with related accounting and finance terms, including the following:

Paid In Capital
Contributed Capital
Stated Capital
Par Value
Initial Public Offering IPO
Balance Sheet
Owners Equity
Preferred Shares
Common Shares


 

Contents

Related Topics

  • For a complete introduction to Owners Equity on the Balance Sheet, see Owners Equity.
  • The article Stock Bond Par Value explains the meaning of Par for new stock share issues.
  • See Balance Sheet, for a complete introduction to Balance sheet structure, contents, and role in financial reporting.
 

Acquiring Contributed Capital
Investors Pay Issuers in Excess of Par

At a public stock offering, the difference between a stock share par value and the actual market price can be large. Par value for a stock is an accounting convention for the price initially set by the company. The concept came into use as a way of letting companies announce publicly that they will sell no shares below a certain price (par), so as to assure investors that no one will receive more favorable prices.

At a company's IPO (Initial public offering), however, the market price can rise far above par, especially if the investing public has high expectations for company growth and company performance. The same difference may appear at the company's secondary, and subsequent stock offerings to the public. In brief, par value says little about the market's confidence in the company or potential future stock prices. What investors are willing to pay, in excess of par, however, is viewed as an indicator of future performance. For this indicator, they can look to the separate components of contributed capital on the Balance sheet.

Paid in Capital on the Balance Sheet
Under Owners Equity

Contributed capital (paid in capital) entries on the Balance sheet show up under Owner's Equity, as shown in the lower part of the Exhibit 1 Balance sheet, below.

Grande Corporation                                   Figures in $1,000's
Balance Sheet at 31 December 20YY   
ASSETS
Current Assets
   Cash
   Short term investments
   Accounts receivable
   Notes receivable short term
   Inventories
   Prepaid exp, insurance, def taxes
          Total Current Assets
Long Term Investments and Funds
Property, Plant & Equipment
Intangible Assets
Other Assets
                    Total Assets


    


1,369
  137
1,832
     20
5,986
  265











9,609
1,460
9,716

1,222
      68
22,075
LIABILITIES
Current Liabilities
Long Term Liabilities
                    Total Liabilities

 
3,464
 5,474
8,938
OWNERS EQUITY
Contributed Capital
   Preferred stock
   Common stock
   Contributed capital excess of par
          Total Contributed Capital

Retained Earnings
          Total Owners Equity


3,798
4,184
 1,457





9,439

 3,698








13,137
          Total Liabilities and Equities
    22,075
 

Exhibit 1. Balance sheet with Contributed Capital listed under Owners Equity.

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