Owner's Equity Paper

Owner's Equity Paper

The corporation is by far the most important form of business in today's growing world. One reason the corporation is such a success is its ability to produce capital. Capital is defined as "financial assets or the financial value of assets, such as cash" (Investopedia, 2013). In the corporation there are two types of capital: paid-in capital and earned capital.

Paid-in Capital

Paid in capital is defined as "the total amount paid in on capital stock--the amount provided by stockholders to the corporation for use in the business" (Kieso, Weygandt, & Warfield, 2012). When stocks are sold above the par value they are put in paid in capital. "The individual stockholder has no greater claim on the excess paid in than all other holders of the same class of shares" (Kieso, Weygandt, & Warfield, 2012). Usually, state laws require companies to keep the paid in capital separate from earned capital.

Earned Capital

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, 2012). Earned capital can also be called retained earnings.

Why is important to Keep Paid in Capital and Earned Capital Separate

It is important for companies to keep paid in capital and earned capital separate not only because of legal reasons, but also because the two accounts are used for different reasons. Paid-in capital is revenue that comes from issuing stocks. This account would be important to investors and management in determining how the company is doing in terms of capital from stocks. The retained earnings or earned capital is from day to day activities of the company. On the Owner's Equity statement these accounts are separate and different activity affects the accounts. For example, if the company takes a loss, or pays out dividends the earned capital account is affected. If the earned capital is affect with positively or negatively it has an affect on the companies net income or overall position. These accounts must be separate to show the real status of the company. If they are combined, many of the ratios used to evaluate the company could be wrong and thus give investors, management, and employees a distorted picture of the company.

Which is more important?

While both paid-in capital and earned capital are important, as an investor on of the