Page 66 - Finance for Non-Financial Managers

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in the business. It includes what they have invested to launch, to
finance, or to refinance the company and what the company
has earned over its existence. The Balance Sheet 47
As noted above, it can also include amounts that owners
have loaned to the business that they cannot get back because
of some subsequent loan agreement with a bank or other lend-
ing source. Such loans are always shown in the liabilities sec-
tion of the balance sheet and never in the equity section,
because they are not legally investment capital until and unless
ultimate repayment is formally relinquished by legal means.
Captions that may appear in this section include the following.

Capital Stock and Contributed Capital
Capital stock is the amount paid into the company by investors
to purchase stock, at some nominal amount per share. It is usu-
ally a small part of what the investors actually paid, for legal
reasons that you don’t even want to hear about. Let’s just say
that investors usually pay more for a share of stock than the
amount shown under this caption; the balance of the proceeds
is reported under a heading such as “Contributed Capital” or
some similar description. These two amounts, when combined,
represent the total amount formally contributed by investors to
finance the company.

Capital stock The amount paid into the company by
investors to purchase stock, at some nominal amount per
share, the par value printed on each share of stock. Par value
is an arbitrary dollar amount assigned to shares of stock for account-
ing purposes during the incorporation process, usually set as low as
possible in order to minimize legal restrictions on the amount classi-
fied as par value. Many corporations today assign no par value to their
shares to avoid this problem entirely.
Additional contributed capital or additional paid-in capital
The amount paid into the company by investors to purchase stock,
beyond the par value of the stock.Also sometimes a general label used
to include both capital stock and additional paid-in capital, especially
when capital stock has been issued at no par value.