Acc/423 W1 Individual

Owners' Equity

ACC/423

Owners' Equity

Owners' equity is one of the three major components of the accounting equation. It is the amount calculated by subtracting organization's liabilities from its assets. It represents the contribution/investment in the company less withdraws, including deducting net loss or adding net income, which ever occurred since the business' inception. “For a corporation, ownership is tracked by the sale of individual shares of stock because each stockholder owns a portion of the business” (Epstein, 2005). This composition will discuss paid-in and earned capital as well as basic and diluted earnings per share as components of owners' equity.

Paid-in Capital Versus Earned Capital

It is important to separate paid-in capital from earned capital. Paid-in capital is the difference between the actual price that investors paid for shares and the cost of the shares at par. The demand for company's shares increases when investors believe the share value will grow in the future, thus investors are willing to pay in excess of the par value. Earned capital is the portion of company's net income the organization chooses not to distribute as dividends, adding it to equity instead. Equity increases with the company's recorded profits and decreases with its recorded losses. When observing the difference between the principle behind paid-in capital and earned capital, it becomes clear that one should track the two kinds of earnings separately to avoid misrepresentation. Simply put, paid-in capital comes from the sale of shares whereas earned capital comes from profitable operation. These earnings come from different sources, thus should not be combined.

Both earned and paid-in capital is important. Earned capital is the accumulation of organization's profitable operation and paid-in capital is the amount contributed by the company's investors. Investors observe equity accounts to assess company's liquidity and strength. Investors compare...