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Owner's Equity Paper

730 words - 3 pages

Owners' Equity Paper PAGE \* MERGEFORMAT 1
Running Head: Owner's Equity PaperOwner's Equity Cycle PaperBarbara BraxtonUniversity of PhoenixACC/423 Intermediate Accounting IIIMary Derx-RobinsonApril 20, 2009Week 1IntroductionThis 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, earned capital is more important to the investor because the earned capital is the amount that the company can actually generate from its operations. Earned capital is also important as the fund available to the company to pay dividends in both the cash and stock dividends. Also, the earned capital reflects how well the company has reserved funds for the future expansion, which would result in an additional return of investments for the investors. On the other hand, paid-in capital is the excess amount from...

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