Why is it important to keep paid-in capital separate from earned capital? Paid-in capital and earned capital are forms of capital that is shown in the shareholders’ part of the balance sheet. Paid-in capital is also known as the capital that is contributed and that are initially issued shares provided by the investors. Earned capital is the earnings that have accumulated since a company has stared. There are different aspects that require the separation of these two, some of which are legal capital and additional paid-in-capital (“Why Is It Important To Separate Paid-In Capital From Earned Capital?”, 2014). Legal capital is the base amount of the paid-in-capital (“Why Is It Important To Separate Paid-In Capital From Earned Capital?”, 2014). Companies often set their stock’s par value at $1 per share (“Why Is It Important To Separate Paid-In Capital From Earned Capital?”, 2014), the total capital then is calculated by multiplying the number of shares issued by the par value. This means that dividend distributions are limited by the legal capital so that the company can stay within the amount of retained earnings plus the additional paid-in capital. Additional paid-in-capital provides a safety net that will help absorb the distribution of dividends or losses in the company’s operation losses before they can get to the legal capital. As an investor, is paid-in capital or earned capital more important? Explain why. Investors are always concerned about all the aspects of the business that they go into. Two of the most important things they should consider are paid-in-capital and earned capital. The owner’s contribution is the paid-in-capital, and the company’s net income less the dividends is the earned capital. Equity is made up of the money that owners invest in a company, some of this comes from the profits that the company makes, and some comes directly from the owners. Paid in capital is important when a company needs financing. It serves as the...
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