Owners Equity paper
Owners Equity paper
In the accounting field there is always a question whether is it ok to keep paid in capital and separate it from earn capital. Accountants today have to be very careful especially with so many accounting laws changing in the United States. More than likely there will always be an investor wanting to know if earned capital more important than paid in capital, or diluted earnings per share more important than the basic earnings per share. This paper is going to answer these questions and tell you why which one is more important and give a better understanding on Owners Equity.
Let’s begin with paid in capital, and how it is important to keep it separated from earned capital. Paid in capital is an amount of investment that a share holder has contributed to a business or an organization. As for earned capital, this is the amount of profit that has been accumulated by the business or organization itself. They have to be kept separated for the stockholders (invertors and shareholders) to see. Paid in capital is not a true eye seeing reflection of the business or organizations performance, and net income would be the source of the earned capital. “Paid in capital can be compared to additional paid in capital, and the difference between the two values will equal the premium paid by investors over and above the par value of the shares. Preferred shares will sometimes have par values that are more than marginal, but most common shares today have par values of just a few pennies. Because of this, “additional paid in capital” tends to be representative of the total paid-in capital figure, and is sometimes shown by itself on the balance sheet (answers.com).” Now if to say the paid in capital and earned capital were not kept separated, it would overstate the net income and show that the business or organization more profitable then what it would really be. The Paid in Capital and Earned Capital can be seen and reported as retained earnings.
Seeing things from an investor’s point of view can be nerve racking. So to help the investor earned capital is more important than the paid in capital. As the investor seeing what is earned is more important, it indicates that the company that was invested into is profitable, and not just able to attract additional money from owners or the investors. The investor just has to make a mental note to want to know the earned capital and remember that paid in capital at times will be exchanged for stocks.
Now basic earnings per share are the earnings that are earned from common stack. (This is calculated by dividing the net income from the available common share holders by the weighted average number of shares that are outstanding). Diluted earnings per share consist of and include common stock, preferred stock, unexercised stock options and unexercised stock options, warrants and some but not many convertible debt. Diluted Earnings per share is reflected on dilutive securities. Any business or organization that does not have dilutive securities, or any business or organization that reports a net loss may only report as the basic per share. If there were any net loss the dilutive earnings would improve negative earnings per share. So as the investor, going with the diluted earnings per share would be the best to invest in the decision, since it lets the investor take a glance at any worst case scenario.
So in conclusion now the investor has a better glance of what is important when it comes too paid in capital, and earned capital, as well as the importance between basic or diluted earnings per share. This paper also gave an understanding to the investor on how important it is to make the right decision as for as equity is concern. As the investor it is important to keep all surroundings open for the best way to invest and keep track of your money.
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ACC 423 Week 1, Owners Equity paper.docx