A classification of capital that constitutes what investors (equity holders) have subscribed to and paid for in full. Contributed capital is the amount of money an entity has received from shareholders in exchange for its shares of stock in issue. Contributed capital is issued when an entity sells its shares- for the first time, on the primary market to investors (who become shareholders or equity owners). First time issuance (or float) takes place usually through an initial public offering (IPO).
When shareholders sell their shares to other investors in the secondary market, the sale doesn’t create more contributed capital. The investors who sell their shares receive the proceeds and not the issuing entity.
The contributed capital consists of two components: the face value (or par value) of the issue- i.e., the base price of the shares issued. This component does not necessarily reflect the market value of the shares in real terms. In accounting, this value is recorded as common stock (ordinary share) on the owners’ equity section of the entity’s balance sheet. The other component is excess capital- which is defined as the amount paid by investors on top of the stock’s face value (issuance premium).
Contributed capital is known as paid-in capital or paid-up capital.
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