Owner's Equity

Owners’ Equity

Owners’ equity is also known as stockholder’s equity, shareholders equity, or corporate capital. However we chose to call it, it equals the amount of net assets. Therefore owners’ equity will increase and decrease along with a company’s profitability or loss. (Kieso, Weygandt, & Warfield, 2010). Typically owners’ equity will consist of capital stock, paid-in capital and retained earnings. Over the next paragraphs it will be explained the importance of maintaining paid-in capital separate from earned capital. Also it will be analyzed the importance of paid in capital and earned capital to an investor; and the importance of basic or diluted earnings per share to an investor.

The first thing that we need to understand is the importance of keeping separate paid-in capital from earned capital. Capital according to Investopedia are the “financial assets or the financial value of assets, such as cash.” This will include factories, machinery and any other equipment owned by the corporation and used in production.

Paid-in capital is also referred to as contributed capital and is the amount paid-in by investors during the issuance of stocks, common or preferred. This includes the par value of share. Paid-in capital is the funds that had been raise by the business from equity and not the money produced by ongoing operations. Paid in capital is important because investors need to see that the organization is able to meet obligations through operations alone and still pay dividends. Earned capital is the capital that the organization has been able to produce from net income. Earned capital is the profit that the organization has generated from operations. Growing companies will usually keep this as retain earnings to use for future growth.

It is important to keep paid-in capital and earned capital separated so the investor and shareholders can clearly see the difference between the two. From the investor’s point of view it is important to be able...