Owners' Equity
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Owners' equity
One of the categories presented on the balance sheet is the stockholders’ equity, which “is the stockholders’ claim on the assets of the business” (Weygandt, Kieso, & Kimmel, 2005, p. 13). The section of the stockholders’ equity encompasses capital stock, additional paid-in capital, and retained earnings (Kieso, Weygandt, & Warfield, 2010, p. 744). It is essential from an economic as well as a legal point of view to distinguish between paid-in capital and earned capital because the sources of funding differ.
Paid-in capital
Stockholders choose to invest assets – most commonly cash - in the corporation providing funds to support business operations. Capital stock and additional paid-in capital represent capital contributed by stockholders in exchange for shares of common or preferred stock. Amounts paid in over par or stated value and paid-in capital from treasury stock is recorded as additional paid-in capital, whereas stated capital is the par value of the shares (Kimmel, Weygandt, & Kieso, 2005, p. 548).
Earned capital
Earned capital or retained earnings represent capital earned by a company as a result of business operations less paid-out dividends. “Earned capital consists of all undistributed income that remains invested in the company” (Kieso, Weygandt, & Warfield, 2010, p. 744). Companies often use a percentage of the net income as retained earnings to reinvest into the company to support development and growth. A net loss occurs when expenses exceed revenues; in this case the net loss is debited to retained earnings. If the net loss exceeds the beginning retained earnings, it may result in negative retained earnings and is recorded as a deficit.
For investors it is more important to concentrate on the amount of earned capital because it represents profit generated through business operations, whereas paid-in capital is generated through the sales of stocks. Studying retained earnings also gives investors an informative overview how well...
One of the categories presented on the balance sheet is the stockholders’ equity, which “is the stockholders’ claim on the assets of the business” (Weygandt, Kieso, & Kimmel, 2005, p. 13). The section of the stockholders’ equity encompasses capital stock, additional paid-in capital, and retained earnings (Kieso, Weygandt, & Warfield, 2010, p. 744). It is essential from an economic as well as a legal point of view to distinguish between paid-in capital and earned capital because the sources of funding differ.
Paid-in capital
Stockholders choose to invest assets – most commonly cash - in the corporation providing funds to support business operations. Capital stock and additional paid-in capital represent capital contributed by stockholders in exchange for shares of common or preferred stock. Amounts paid in over par or stated value and paid-in capital from treasury stock is recorded as additional paid-in capital, whereas stated capital is the par value of the shares (Kimmel, Weygandt, & Kieso, 2005, p. 548).
Earned capital
Earned capital or retained earnings represent capital earned by a company as a result of business operations less paid-out dividends. “Earned capital consists of all undistributed income that remains invested in the company” (Kieso, Weygandt, & Warfield, 2010, p. 744). Companies often use a percentage of the net income as retained earnings to reinvest into the company to support development and growth. A net loss occurs when expenses exceed revenues; in this case the net loss is debited to retained earnings. If the net loss exceeds the beginning retained earnings, it may result in negative retained earnings and is recorded as a deficit.
For investors it is more important to concentrate on the amount of earned capital because it represents profit generated through business operations, whereas paid-in capital is generated through the sales of stocks. Studying retained earnings also gives investors an informative overview how well...