Corporate Finance & Accounting

invested capital

What is an investment?

Paid-up capital, also known as paid-in capital, is cash and other assets that shareholders give to a company in exchange for stock. Investors make capital contributions when a company issues stock at a price that shareholders are willing to pay. Contributed or total paid-up capital represents their share or ownership in the company.

Paid-in capital can also refer to a company’s balance sheet item listed under shareholders’ equity and is usually shown along with a balance sheet entry for additional paid-in capital.

Learn about investing

Contributed capital is the total value of shares purchased by shareholders directly from the issuing company. It includes funds from initial public offerings (IPOs), direct listings, direct public offerings and secondary offerings — including the issuance of preferred stock. It also includes the exchange of fixed assets for inventories and the reduction of liabilities for inventories.

Contributions can be compared to additional paid-in capital, and the difference will be equal to the premium the investor pays over the par value of the company’s stock. The face value is only the accounting value of each proposed share, not the market value that investors are willing to pay.

When the company repurchases shares and returns funds to shareholders, the repurchased shares are listed at the repurchase price, reducing shareholders’ equity.

key takeaways

  • Paid-up capital, also known as paid-in capital, is cash and other assets that shareholders give to a company in exchange for stock.
  • This is the price shareholders pay for their shares of the company they hold.
  • Contributed capital is reported in the shareholders’ equity section of the balance sheet and is usually divided into two different accounts: the common stock and the additional paid-in capital account.

The par value of preferred stock sometimes exceeds the margin, but most common stock today is worth just a few cents. Therefore, “additional paid-in capital” tends to represent total paid-in capital and is sometimes shown separately on the balance sheet.

Contribute

It is important to distinguish between capital contributions, which are the injection of cash into a company, which can come in other forms besides the sale of equity. For example, the owner might take out a loan and use the proceeds to fund the company. Businesses can also receive contributions in the form of non-cash assets, such as buildings and equipment. These scenarios are all types of capital contributions and increasing owner’s equity.However, the term invested capital Usually keep the amount received from issue stock rather than other forms of funding.

Calculate contribution

Contributed capital is reported in the shareholders’ equity section of the balance sheet and is usually divided into two different accounts: the common stock and the additional paid-in capital account. In other words, the contribution includes the par or notional value of the stock in the common stock account, and the amount shareholders are willing to pay for the stock in excess of the par value – the stock premium – which can be found in the additional paid-in capital account.

The common stock account is also called the capital account, and the additional paid-in capital account is also called the capital premium account.

Contribution example

For example, a company issues 5,000 shares of $1 par value to investors. Investors pay $10 per share, so the company raises $50,000 in equity. As a result, the company recorded in the common stock account $5,000 and paid-in capital of $45,000 in excess of par. The two accounts add up to the total amount shareholders are willing to pay for their shares. In other words, the contribution is equal to $50,000.

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