Acc 423 - Owners' Equity

Leroy Burnside

ACC/423

Owners’ Equity

This paper will specify the significant aspect of separating paid-in capital from earned capital and why it is suitable to keep it separate. In addition, discussion of which earnings per share will bring in more money, basic or diluted based from the point of view of the investor. Finally, showing that diluted earnings per a share are a better representation of the actual profit the investor can earn.

Owners’ Equity

Owner's Equity consists of the capital obtained from stock and retained earnings is the prime consistence of capital within a corporation. Within the capital consists of a separating of additional paid in capital that derives from common stock and earned capital that is otherwise known as retained earnings. To an investor the most important capital is earned as the dividends will be or can be paid out. In addition there are two different earnings per share, diluted and basic earnings per share. The most essential to an investor is diluted as this share amount is spread as a smaller amount and is not the true value of the investment.

Separation of paid-in capital from earned capital

When the company issues the stock to its investors, it receives certain capital as their investment, and this is known as the paid-in-capital. This type of capital is not generated from the operations of the company, but it is the excess over the par value of the stock that the investors are willing to pay for the stock they receive from the firm. Thus it is the amount paid in on the capital stock by the stockholders to the company. It therefore represents the shareholders investments, while the earned capital is the capital that is accumulated from the profits of the company. Hence it is essential for the company to split these two types of capital to ensure the investors about the operations of the company and its profitability. It is the undistributed income that remains with the firm (Kieso, Weygant, & Warfield, 2007).

Paid-in and Earned Capital

An investor’s decision to invest in any company depends on the ability of the firm to generate continuous income flow and profitability, the policy relating to the dividend and the growth plans of the firm. The earned capital is generated from the operations of the company, and it is used to pay up the dividends in terms of both cash and stock. It also reflects the prosperity of the company attracting further investment for the investors. While the paid-in