What is Additional Paid-in Capital vs. Contributed Capital?
Stockholders’ equity is related to additional paid-in capital vs. contributed capital. The key difference between the two is that the contributed capital is referred to as the total value of cash and assets that shareholders provided to a company in exchange for the company’s shares. The additional paid-in capital indicates the value of cash or assets that the shareholders provided in excess of the par value of the company’s shares.
The difference between additional paid-in capital vs. contributed capital also determines the distinction in the accounting reporting of the items. Both types of capital are recorded on the balance sheet under the stockholders’ equity section. The additional paid-in capital is recorded into a separate account under the equivalent name. On the other hand, the contributed capital usually does not include a separate account on the balance sheet, but it can be determined as the sum of the common stock and additional paid-in capital accounts.
What is Additional Paid-in Capital?
Additional paid-in capital is the value of share capital above its par value. It is also commonly known as the “contributed capital in excess of par” or “share premium.” Essentially, the additional paid-in capital reveals how much money investors paid for the shares above their nominal value. In other words, it indicates the difference between the actual price the investors paid for the company’s shares and the nominal value of the shares.
Remember that the par value of a stock is usually an extremely small amount (e.g., $0.10 or $0.01) that appear on stock certificates. In some cases, the par value can even be lower than $0.01. The par value must not be confused with the market value of shares. Par value indicates the minimum value at which a company may sell its shares to the investors. On the other hand, the market value of shares is determined by the transactions occurring in the market.
Additional paid-in capital is recorded on a company’s balance sheet under the stockholders’ equity section. The account for the additional paid-in capital is created every time when a company issues new shares to or repurchases its shares from shareholders. Note that the transactions with the company’s shares in the secondary market do not affect the company’s paid-in capital since it does not receive any cash for the transactions.
What is Contributed Capital?
Contributed capital (also known as the paid-in capital) is the total value of a company’s equity purchased by investors directly from a company. In other words, it indicates the total amount of money that the shareholders paid to a company to acquire their stakes in it. A company’s contributed capital includes the value paid for equity through initial public offerings (IPOs), direct public offerings, and public listings. Essentially, contributed capital includes both the par value of share capital (common stock) and the value above par value (additional paid-in capital).
Contributed capital is reported on the balance sheet under the stockholders’ equity section. On the balance sheet, the contributed capital is reported under two separate accounts: common stock account and additional paid-in capital.
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