Owners' Equity Paper

Owners' Equity Paper

August 19, 2013

University of Phoenix

ACC/423

Owners' Equity Paper

This paper will explain why it is important to keep a company's paid-in capital separate from their earned capital. It will also explain which is more important to an investor the earned capital or the paid-in capital. As well as cover why from an investor's standpoint, the basic or diluted earnings per share would be more important.

Let's discuss a few of the differences between paid-in capital and earned capital also known as retained earnings (Putra, Lie D. 2007). The money that is collected from investors through the sale of stock is called paid-in capital. Earned capital is just what the name implies, monies that are made by the operations of a successful company. Earned income is basically the monies that are earned or associated with doing a specific action or job (Laukkonen, 2003-2013). A paycheck or a salary would be examples of earned income. While capital income is derived from investing in thing like stock dividends or interest being paid on a certificate of deposit or savings account (Laukkonen, 2003-2013). Even though both of these items amounts are listed on the balance sheet it is vital that they are kept separate.

The main reason for keeping these items separate on the balance sheet is because of the way they are required to be reported. The investors want to be able to clearly see the amount of monies a company generates from their operations. This information is vital to investors because as an investor you would not want to invest into a company that is unable to generate an income separately from outside providers, creditors, or funders such as investors. Be separating the two monies the owners of the company can view the company's financial situations free from misunderstandings or confusions about how the monies were generated. Having these two items separately recorded allows the financial situation of a company to be viewed in the proper way.

Another reason for keeping the monies separated is that the earned income total of monies generated is more important than that of the paid-in capital. This means that the monies generated from the daily operations of a company is more important to a company than the monies received from investors (Kieso, D. E., Weygandt, J. J., & Warfield, T. D. 2010). The larger the total of earned income a company has the better or more successful the company is. As an investor you want to see companies earning more earned income because that increases the probability that the company will be paying dividends back to their investors.

Another important factor to an investor is if a company is paying returns to their investors by basic earnings per share or diluted earnings per share. Basic earnings per share is pretty self-explanatory, meaning that the amount of monies the company has generated and holds available for the investors split by the amount of shares held by investors without a gain on their return of their investment. Diluted earnings are the per share amount of monies that the company has less the preferred investors dividend totals, leaving just the minimal amount of earnings per share (Kennon, n.d.). Diluted earnings are essentially the minimal amount of monies that a company will pay to their stockholders.

An informed investor will understand

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