Keep paid-in capital separate from earned capital
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O Why is it important to keep paid-in capital separate from earned capital?
o As an investor, is paid-in capital or earned capital more important? Why?
o As an investor, are basic or diluted earnings per share more important? Why?
Please make the response coherent and thank you for getting me started on this!
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Solution Summary
The expert determines why it is so important to keep paid-in capital separate from earned capitals.
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Meaning of earned capital:
Earned capital means the capital accumulated through profitable operations of the company. The source of earned capital for the company is net income. If the company keeps part of net income after paying dividend, then that amount is transferred to retained earnings account. Therefore, retained earnings of the previous financial years and the net income of the current year constitute earned capital. Earned capital is mentioned in the liability side of the balance sheet as the shareholders' equity.
Meaning of paid up capital:
Paid up capital is the amount actually paid by the shareholders towards the equity of the company for use in the business. Paid up capital consists of par value of all stock and premiums less discount on issuance of shares. Paid up capital is the amount of investment made by the shareholders. Paid up capital is also knows as contributed capital.
Difference between earned capital and paid up capital:
Earned capital is the amount generated by employing the paid up capital in the business of the company (as the return earned from the investment). Earned capital is important for prospective investors and shareholders.
Example:
Balance sheet of XYZ company as at 31.12.2009
Liabilities Assets
Current liabilities: ...
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