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.
