Owners'_Equity_Paper

Owners’ equity is also known as stockholders’ equity, shareholders’ equity or capital and consists of paid in capital and earned capital. Owners’ equity “represents the resources that have been invested by the owners of the company” (Money-Zine.com, n.d., p. 1). Owners’ equity is important to investors because owners’ equity represents the value of the company after creditors have been paid and represents the owners’ equity as the assets minus liabilities. This paper will look at why it is important to keep paid in capital separate form earned capital, determine if paid in capital or earned capital is more important to investors and why, and finally examine basic and diluted earnings per capital to establish that is more important to an investor. Why is it Important to keep Paid in Capital Separate from Earned Capital Paid in capital, also known as contributed capital, and earned capital are important to investors. Paid in capital is the capital that has been contributed by stockholders’ or owners of the corporation. These monies represent an investment from the stockholders’ for use in the business to support the company in exchange for ownership in the business. Paid in capital is recognized when a company sells stocks and receives cash in exchange or exchanges common stock and acquires an asset and is recorded on the balance sheet. Earned capital is the profits that are generated by the company and is the “capital that develops from profitable operations” (Kieso et al., 2008, p. 729). Earned capital corresponds to the profits of the company and represents net income. Once dividends are paid to stockholders’ and ample net income is available, the result is retained earnings. It is important to analyze the difference between paid in capital and earned capital so that investors can have an accurate picture of the finances of the company. Paid in capital represents investments from shareholders, as an investor, would be important to know how much has been invested in the company. Paid in capital does not provide an accurate picture of a company’s performance. Earned capital would represent “undistributed income that remains invested in the company” (Kieso et al., 2008, p. 729). If both paid in capital and earned capital were combined, the result would be an overstatement of net income and incorrect financial statements. By separating paid in from earned capital, the company can report the accurate income of the company. References Investopedia. (2010). Diluted earnings per share. Retrieved June 6, 2010 from http:/www.investopedia.com/terms/d/diluteddeps.asp Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2008). Intermediate accounting (12th ed.). Hoboken, NJ: John Wiley & Sons, Inc. Money-Zine.com. (n.d.). Owners’ equity. Retrieved June 5, 2010 from http://www.money-zine.com/Definitions/Investing-Dictionary/Owners-Equity/