Owner s Equity Paper

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Owners Equity Paper Mary Kahm ACC/423 August 15, 2011 Tracy Ohlinger

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So what is owners equity? Owners equity refers to the interest that common stockholders have in a company. Stockholders are the individuals who have paid-in capital to a company to provide funding intended to be used for operations of the business. There are three separate classes that portray the reporting aspect behind owners equity, those being capital, additional paid-in capital, and retained earnings. During this paper you will learn about the importance of keeping paid-in capital separate from earned capital, if you were an investor is paid-in capital or earned capital more important, and if you were an investor, are basic or diluted earnings per share more important. Paid-in capital, also called contributed capital, is the amount paid from stockholders for use in business. (Kieso, Weygandt, & Wartfield, 2007) On the other hand, earned capital is the capital that derives from the profitable operations of a companys everyday business. So separation of the two capitals is important for investors and/or a stockholders view on the companys financials. Paid-in capital is the funding that is provided to a company from the sale of capital stock; while earned capital is money that the company earns as a result of profitable operations. It is very important to keep these two separate because they represent two distinctive sources of funding. Paid-in capital represents the companys profits from operations. To combine the two would misrepresent the earning potential from operations. From an investors point-of-view, it is going to be far more important that a company earns their money from operations rather than the sale of stock. The amount of earned capital that a company reports in their financial statements will show the stockholders the value of their investment. Whereas a firm that continuously reported their paid-in capital in excess of earned capital, would not be perceived as a good investment opportunity.

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The diluted earnings per share are going to show the investor all of the potential dilutive common shares that were outstanding during that period. As an investor, inspecting the diluted earnings per share is probably going to be important because this calculation also shows the basic earnings per share-net income (preferred dividends) divided by the weighted-average shares outstanding, plus the earnings per share less any convertibles and impact of options, warrants, and other dilutive securities. Paid-in capital is to stay separate from earned capital. This is to help prevent misinterpreting the sources where the operational funding originated. Investors are more prone to being concerned about a companys earned capital in comparison to its paid-in capital. This has to do with the fact that a companys earned capital represent the earning capabilities of the company. The diluted earnings will show us a more detailed explanation of basic earnings per share calculations. This would also include the impacts that dilutive securities can have on earnings.

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References:
Donald E. Kieso, Jerry J. Weygandt, Terry D. Warfield, (2007). Intermediate Accounting (12th ed.