Owners' Equity Paper
University of Phoenix
January 21, 2013
Owners' Equity Paper
Stockholders’ equity, shareholders’ equity, and corporate capital all define the owners’ equity in a corporation. The stockholder’s equity normally has three categories that appear. The three categories are: capital stock, additional paid-in capital, and retained earnings. Capital stock and additional paid-in capital makes up and represents the contributed (paid-in) capital. Earned capital is represented by the retained earnings.
In the text it states, “Contributed (paid-in) capital is the total amount paid in on capital stock – the amount provided by stockholders to the corporation for use in the business. Contributed capital includes items such as par value of all outstanding stock and premiums less discounts on issuance,” [ (Kieso, Weygandt, & Warfield, 2010) ]. The excess amount over which the amount of the stock is worth that the investor pays for the stock is considered the contributed (paid-in) capital. In the text it states, “Earned capital is the capital that develops from profitable operations. It consists of all undistributed income that remains invested in the company,” [ (Kieso, Weygandt, & Warfield, 2010) ]. It is important to keep contributed (paid-in) capital separate from earned capital because they are two separate forms of funding. One of them is new money that is intended to assist the operations and increase earned income. The other is the profits that are a result from operational activities. If the two values were combined it would misrepresent that total amount that is earned from its existing operations. In return it would also misrepresent how much new money is available to assist with the operations.
As an investor, earned capital is more important than paid-in capital. When an investor invests their money into a company, the end result is what makes the different. If the
References: Kieso, D. E., Weygandt, J. J., & Warfield, T. D. (2010). Chapter 15: Stockholders ' Equity. In D. E. Kieso, J. J. Weygandt, & T. D. Warfield, Intermediate Accounting, Thirteenth Edition (p. 744). John Wiley & Sons.