Owners Equity

Owners' Equity

ACC/423

December 22, 2014

Owners' Equity

Introduction

Owners’ Equity in a corporation is defined as stockholders’ equity, shareholders’ equity, and corporate capital (Kieso, Weygandt, & Warfield, 2013, pg. 824). The two sources of owners’ equity for stockholders are paid-in capital and earned capital. There are many aspects of investments that investors have to watch closely. This paper will address the aspects by thinking beyond the basic definition of owners’ equity. The investor must understand the importance of separating paid-in capital and earned capital while determining which one is important as well as examining and understanding the importance between basic and diluted EPS.

Separation between Capitals

Paid-in capital is capital raised from the sale of capital stock in the form of shares that is contributed to a corporation by investors. Earned capital is capital that develops from profitable operations (Kieso, Weygandt, & Warfield, 2013, pg. 824). Paid-in capital and earned capital are both significant for growth and expansion for a corporation’s operations.

Investors find it necessary and important to separate these two sources of capital because both are sources of revenue and distinct funding and the two values of capital show the strength of a company. Paid-in capital signifies that the funds are used to enhance earned income and the earned income symbolizes that the funds accrued from a profitable operation in the corporation. Paid-in capital accelerates and boosts the earned income; so combining the two sources would lead to confusion, misinterpretation, and misrepresentation of capital and cause complexity in calculations.

Investors should be aware of manipulation of their earnings and computations because if the two sources of capital were combined, it would be difficult to determine which method to use for computation of earnings. By separating the two sources, investors and shareholders can distinguish...