Paid in Capital vs. Earned Capital

Paid in Capital vs. Earned Capital Earned capital and paid in capital are two important items for investors. Earned capital comes from any profits the operation gathers. Paid in capital is the amount of investment a shareholder has contributed to the business for use (Business Finance, 2008). The following paragraphs will contribute a more detailed definition of what these two components are used for and why they are important. This essay will also touch on diluted earnings per share and basic earnings per share. Earned capital is developed from net income. Earned capital is found under retained earnings and on the balance will be located in the owner’s equity (Business Finance, 2008). Earned capital is the profit that the operation or organization has generated. This profit is kept in the company and invested (Intermediate Accounting, 12th ed., pg. 729). Paid in capital is the capital a company receives from investors over the stated value of the stock. Paid in capital is also known as contributed capital (Business Finance, 2008). An example of paid in capital is when the stock is selling for $10 but the investor buys the stock for $15 the additional $5 is paid in capital. Paid in capital is the amount provided by stockholders to the corporation for use in the business Paid in capital consist of par value of all stock and premiums less discounts on issuance (Intermediate Accounting, 12th ed., pg. 729). Paid in capital needs to be separate from earned capital because the investors need to see that the amount is clearly stated. If paid in capital is combined with earned capital then net income will be overstated (Wikianswers, 2008). If net income is overstated the financial statements will not be valid. Diluted earnings per share are composed of all stock options, warrants, preferred stock and convertible bonds that may be exercised (About Investing for Beginners, 2008). Basic earnings per share takes into account the shares that

References: Kieso, D., Weygandt, J., Warfield, T., 2007, Intermediate Accounting, 12th edition. John Wiley and Sons, Inc. Earned Capital, 2008, Obtained from the World Wide Web July 9, 2008: http://www.money-zine.com/Definitions/Investing-Dictionary/Earned-Capital/ Paid in Capital, 2008, Obtained from the World Wide Web July 9, 2008: http://www.businessfinance.com/paid-in-capital.htm Paid in Capital, Earned Capital, 2008, Obtained from the World Wide Web July 9, 2008: http://wiki.answers.com