Owners' Equity Paper
Owners’ equity (OE) in a corporation rises or falls with the profitability of that corporation. OE equals the net assets of a corporation and is made up of two main components, paid-in capital and earned capital. Paid-in capital is made up of the funds provided by stockholders also known as contribution capital, and any additional paid-in capital from other sources. Earned capital consists of the retained earnings of a corporation and is derived from the profitability of operations within that corporation (Kieso, Weygandt, & Warfield, 2007). Beyond the basic definition of OE, an investor must know the importance of keeping paid-in and earned capital separate, which is more important, and understand basic versus diluted earnings per share. Separation of Paid-In and Earned Capital
For any corporation, the OE section of the balance sheet will be broken down between paid-in capital and retained earnings. As mentioned above, paid-in capital will consist of contribution capital by way of common or preferred stock issue, and additional paid-in capital above par value of stock. The reason for separation between paid-in and earned capital is on the basis of either showing as a type of loan to the organization versus the capital raised through sound operations and profitability. Contribution capital is money received by the corporation from the stockholders to be used in operations, whereas retained earnings or earned capital is the manner in which the corporation uses the contribution capital for success. In addition, any dividends paid to stockholders will be based upon the retained earnings of the corporation and not upon paid-in capital (Averkamp, 2011). What is more Important, Paid-In or Earned?
While both paid-in capital and earned capital are important factors in the OE equation, earned capital will be most important to investors. Regardless of how much capital is raised by a corporation in paid-in capital and...