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Owners’ Equity Paper

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           Owners’ Equity Paper

Callie Pitts


January 10, 2016

Kristie May

Owners’ Equity Paper

        A company’s equity is comprised of funds invested by the owner (s), investors.      Equity comes in various forms such as actual funds paid in to a company as well as the profit earned by the company. There are two primary components for this, Paid in Capital and Earned Capital. These two types of capital vary a great deal and have different impacts to a company’s financial statements and the owners. Although both are forms of capital they must be segregated and are treated differently from the other.

Paid in Capital

                 Paid in Capital is the amount of capital contributed by investors by way of preferred stock issuances. This will also include the par value of the preferred stock and only represents profit that has been gained from the businesses equity. Funds earned through ongoing operations are not included.  Placement of Paid in Capital on the financial statements is located on the balance sheet under the stockholders equity section ("Paid in capital," 2016).

Earned Capital

                 Earned Capital is represented by a company’s net income. The net income can electively be held as retained earnings or paid out to investors as a dividend. This form of capital is derived purely from a company’s profits through their ongoing operations and not by funds actually paid into the company by investors. Earned Capital is also reflected on the balance sheet ("Earned capital," 2016).

Separating Paid in and Earned Capital

                 Based on the description provided above of Paid in Capital and Earned Capital it is clear that these are each derived from significantly different sources. One being funds paid in by investors while the other is the profit earned by way of ongoing operations. Each of these forms of capital has a different expectation in the return yielded. Comingling of Paid in and Earned Capital would misrepresent a company’s equity and not provide the necessary information to the investors. A company could easily over or under pay dividends if the Paid in Capital was combined with the Earned Capital. In addition to this, a company needs to be able to easily determine their Earned Capital to properly assess their previous and current financial positioning to properly forecast their current and future business and investment decisions.

                From another angle each of these forms of capital are used for other purposes that would significantly be impacted if they are not segregated such as the price of shares, par value, accumulated income measurements, and dividend distribution measurements.

Investors and Capital

                 As an investor both Paid in and Earned Capital are important. The Paid in Capital affects their return on investment while the Earned Capital reflects the success or failure of their investment decision. Furthermore, the Earned Capital is a driving detail in their future investment decisions.



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