Owners Equity Paper

A potential investor considers many different factors in the search for an investment which will achieve a substantially profitable return on his or her money. One such factor to examine is a corporation’s owner’s equity in order to understand the company’s earnings and capital. “Owner’s equity in a corporation is defined as stockholders’ equity, shareholders’ equity, or corporate capital” (Kieso, Weygandt, & Warfield, 2007). A potential investor may find importance in evaluating whether or not a corporation keeps its paid-in capital separate from its earned capital. The investor also may place greater importance in either paid-in capital, or earned capital. Lastly a potential investor might find greater importance in basic or diluted earnings per share. The purpose of answering the preceding questions is to potentially find corporations worthy enough to invest money into who are financially strong and may eventually reveal a profit to the investor.

Why us it important to keep paid-in capital separate from earned capital?

The importance of keeping paid-in capital and earned capital separate can not be overstated enough. The difference between the contributed capital from the company’s stockholders and the retained earnings representing the profitability of the company’s operations must be shown separate in order to determine the company’s financial strength and potential. “Contributed Capital is funds or property transferred to a company by its stockholders. The contribution may be made in return for stock, in which case the payment is recorded as paid-in capital” (YourDictionary.com, 2009). The amount of contributed capital must be presented separately so as to recognize the company’s retained earnings.

The retained earnings of a company are what's left after expenses on its income statement, similar to savings on an individual income statement. They equal total profit minus corporate income taxes and corporate dividends (Join the Conversation, 2007)....