Owners' Equity Paper Ã¯Â¿Â½ PAGE \* MERGEFORMAT Ã¯Â¿Â½1Ã¯Â¿Â½
Running Head: Owner's Equity Paper
Owner's Equity Cycle Paper
University of Phoenix
ACC/423 Intermediate Accounting III
April 20, 2009
This paper was challenging to write because understanding the subject of paid-in capital and earned capital is not easy to explain when putting it on paper. I believe that the best thing to do is to give good definitions of the two financial areas are important before I can answer the questions for this assignment.
Why is it important to keep paid-in capital separate from earned capital?
Paid in capital is the capital received from investors in exchange for stock when the stock is issued by the company. It is not capital that is generated as a result of the operation of the company but is the excess amount from the par value of the stock that the investors are willing to pay in exchange for stock.
Paid-in capital is the amount paid in on capital stock; this amount is provided by stockholders to the company.
Therefore, paid-in capital represents the investments made by the shareholders. Earned Capital is the capital accumulated through the profitable operation of a company. It is important for the company to separate paid-in capital from earned capital because the investor will be able to see how well the company can generate capital that results from the operation of the company. This is undistributed income that remains invested in the company (Kieso, Weygant, & Warfield, 2007).
As an investor, is paid-in or earned capital more important? Why?
The most important thing the investor will concern himself with is the ability of the company to generate income and profit, the dividend policy of the company, and the expansion plans of the company. Hence,