Owners Equity
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Owner’s Equity Paper
Arbra Jones
Intermediate Financial Accounting ACC/423
Professor Scott Ronk
October 29, 2012
Owners’ Equity Paper
Owner’s Equity covers the interest of common shareholders and preferred shareholders have in a business. Individuals that have paid-in capital into a company to provide money which aides in the company day-to-day operations are considered stockholders. The following is a brief summary analysis of the importance of separating paid-in capital from earned capital, as well as an analysis determining if paid-in capital is more desirable than earned capital from an investor’s point of view, including if investors find basic earnings per share is more or less important than diluted earnings per share.
Separation of Capital
The main reason for the separation of paid-in capital from earned capital is because paid-in capital is the amount of capital that the shareholders have made into the business for business use; while earned capital is the amount of capital the shareholders have made a profit from the business. Earned capital is the result of net income. On the balance sheet earned capital is located under owner’s equity section and can also be found under retained earnings. Because earned capital is the amount of profit that an organization has made, this amount is invested back into the organization.
Paid-in capital, the capital that an organization receives from its investors and shareholders, is also classified as contributed capital (Kieso & Weygandt, 2010). To be considered paid-in capital an investor would buy stock that has a selling price per share of $15 but is purchased by the by the investor for $20. The difference of $5 would be paid-in capital. This excess is the amount an organization will use for purposes of the business. Paid-in capital covers amounts of par value stock and any premiums minus discounts when issued. It is important to identify paid-in capital from earned capital to help...
Arbra Jones
Intermediate Financial Accounting ACC/423
Professor Scott Ronk
October 29, 2012
Owners’ Equity Paper
Owner’s Equity covers the interest of common shareholders and preferred shareholders have in a business. Individuals that have paid-in capital into a company to provide money which aides in the company day-to-day operations are considered stockholders. The following is a brief summary analysis of the importance of separating paid-in capital from earned capital, as well as an analysis determining if paid-in capital is more desirable than earned capital from an investor’s point of view, including if investors find basic earnings per share is more or less important than diluted earnings per share.
Separation of Capital
The main reason for the separation of paid-in capital from earned capital is because paid-in capital is the amount of capital that the shareholders have made into the business for business use; while earned capital is the amount of capital the shareholders have made a profit from the business. Earned capital is the result of net income. On the balance sheet earned capital is located under owner’s equity section and can also be found under retained earnings. Because earned capital is the amount of profit that an organization has made, this amount is invested back into the organization.
Paid-in capital, the capital that an organization receives from its investors and shareholders, is also classified as contributed capital (Kieso & Weygandt, 2010). To be considered paid-in capital an investor would buy stock that has a selling price per share of $15 but is purchased by the by the investor for $20. The difference of $5 would be paid-in capital. This excess is the amount an organization will use for purposes of the business. Paid-in capital covers amounts of par value stock and any premiums minus discounts when issued. It is important to identify paid-in capital from earned capital to help...