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What's Inside Steward Carlson's Accounting Office?
"Yes, and in a corporation, the contributed capital is different from its legal capital," answers Miss Tecson, the accounting supervisor. "Corporation accounting separates the equity accounts from its earnings. Sole proprietorships and partnerships record contributed capital in the same manner. The contributions in a sole proprietorship and partnership are credited to their respective capital accounts. Profit or loss affects the capital accounts of these two entities, too," Miss Tecson elaborates.
"Thank you, Miss Tecson," replies Kelly, "I think I need to read my accounting books again."
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Contributed Capital in The Three Kinds of Business Organizations
Contributed capital is the actual contribution made by an owner or owners of a certain business organization. In discussing contributed capital, it is necessary to discuss the three kinds of business organizations—Single Proprietorship, Partnership and Corporation—to know how a business is formed and how it acquires its contributed capital.
In a single proprietorship, the business derives its contributed capital from the actual contribution of the owner. The procedure is the same in a partnership, wherein contributed capital is acquired by the actual contributions of the partners. The only difference between a partnership and a single proprietorship is that the latter has a single owner while the former has two or more partners, with different contributions credited as contributed capital.
In a corporation, the contributed capital of the shareholders are made in return for stock, in which case the payment is recorded as paid-in capital, or it may be a donation in which it is recorded as donated capital. Shareholders transfer funds or property to a company. In this form of organization, contributed capital is composed of two specific segments or components:
- Stated capital is the par value of the shares of capital shares that are acquired by investors.
- Additional paid-in capital refers to any capital received for the shares, that is above and beyond the par or stated value of the shares.
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How Do We Record Contributed Capital?
In recording the transactions below, let us remember that an individual account has two sides: left and right. Assets are normally placed at the left side and capital or equity accounts are posted on the right side.
In a single proprietorship where the records are simpler than the other two entities, the owner’s contributed capital is his investment. Client Mr. Roxas, for example, has the following assets as investment in a laundry shop:
- Cash: $50,000
- Furniture and fixtures: $60,000
To record the above investment, Cash is placed at its left side, with the corresponding amount of $50,000. Furniture and Fixtures, also an asset, is also recorded at its left side with the corresponding amount of $60,000. Mr. Roxas, Capital is recorded at its right side with a corresponding amount of $110,000 ($50,000 and $60,000 added together). In this transaction, the total contributed capital of Mr. Roxas is $110,000, or the amount equivalent to what is credited or posted at the right of the Mr. Roxas, Capital account.
If the business is a partnership, the contributed capital is equal to the actual contributions of the partners.
In Roxy and Jade Partnership, another client of Carlson, for example, Partner Roxy puts in $40,000 Cash, and Partner Jade puts in $50,000 worth of Merchandise Inventory.
In recording the above transaction, the asset Cash has a corresponding amount of $40,000 posted at its left side. The other asset, Merchandise Inventory, is also recorded with the amount of $50,000 at its left side. Roxy, Capital account and Jade, Capital account are created with the corresponding amounts of $40,000 and $50,000, respectively, and are posted at their respective right sides.
Capital contributed by shareholders comes from the sale of shares of stock. The shares of stock issued are generally referred to as share capital. Legal capital is that portion of the contributed capital, or the minimum amount of paid-in capital, which must remain in the corporation for the protection of corporate creditors. Shares may either be recorded with a par value, or without a par value. A par value is a specific amount that is fixed in the articles of incorporation and appearing on the certificate of stock. It is also the minimum issue price of the shares.
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Components of Contribute Capital for Corporations
What are the different stock issuances?
Issuing Share Capital At Par Value
For example, the corporation client, Nars Holdings is authorized to issue $1,000,000 in ordinary shares, divided into 10,000 shares, with a par value of $100 per share. The company issued on cash basis, 2,000 shares at par value. To record this share issuance:
Cash account is posed at its left side with the corresponding amount of $200,000 or 2,000 shares multiplied by $100 per share, while Ordinary Shares account is created and the amount of $200,000 is posted at its right side.
The amount of $200,000 invested in the corporation is called paid-in capital or contributed capital. The posting to the Ordinary Shares account increases the share capital of the corporation.
Issuing Share Capital Above Par Value
Suppose the 2,000 shares are sold at $150 per share, the records will show the following:
Cash account is posted at its left side with the amount of $300,000, or 2,000 shares multiplied by $150 per share. Ordinary shares account is created with the corresponding amount of $200,000, and the difference of $100,000 is posted as Share Premium account with the corresponding amount of $100,000.
Issuing No par Share Capital with Stated Capital
When shares without par value are sold, the proceeds should be credited to the Ordinary Shares Account. The accounting for the issuance for preference shares is basically the same as that of the ordinary shares.
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Conclusion: Importance of Contributed Capital to Business Financial Position
A business cannot start its operations without capital contribution. Contributed capital is the actual capital contribution invested by the business owner. Contributed capital is one of the two possible sources of funds for the business - the other one comes from outside entities whom we call creditors.
The contributed capital of a Single Proprietorship, Partnership and Corporation do not affect the asset and liability sections of their Statements of Financial Position. The only difference is in the owners’ equity section. Single Proprietorship and Partnership use capital accounts and ultimately combine the owners’ contributions and accumulated savings. Corporations separately report contributed capital and accumulated profits in accordance with some legal provisions.
Book and Image Credits:
Partnership and Corporation by Balada and Balada, 2010