Discussion of Owner's Equity

Discussion on Owners' Equity

Stockholder's equity represents the owner's residual interest in the assets of the corporation. It is broken down into two components. Paid-in-capital amounts received from owners for shares of the corporation's stock. Earned capital, also known as retained earnings is the amount of net income retained by the corporation. Paid-in-capital includes stocks accounts, such as, preferred stock and common stock. Owners of preferred stock generally does not vote, and they will be the first ones to receive dividends when paid. They are also the first ones to be paid in the event the corporation is liquidated. Owners of common stock are the ones that votes for the board of directors and are the true owners of the corporation.

It is important for a corporation to keep paid-in-capital and earned capital separate for legal and economic reasons. From the legal standpoint, a corporation can declare dividend out of retained earning in all states, but in many states, dividends cannot be declared out of paid-in-capital.

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From an economically standpoint, management, stockholders, and others look to retained earnings for the continued existence and growth of the corporation.

As an investor, I believe that paid-in-capital is more important because as an owner I have certain rights. I have the right to vote for the directors of the company, to share in the corporate assets if the corporation is liquidated, to share in the profits and losses and to share in any new stocks that is issued. As individual owning shares in a corporation I may sell them to others at any time and at any price without obtaining the consent of the company or other stockholder

Basic earning per share tells an investor how much of the company's profit belongs to each share of stock. Diluted earning per share takes into...