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Owner's Equity Paper - Essay Example

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Earned Capital is accumulated through the earnings of a company or in simple words it is accumulated through the company’s net profit. Earned Capital is shown under the head of retained…
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Owners Equity Paper
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Download file to see previous pages If either happens, Financial Statements of a business become invalid or forged. If we show both Earned and Paid Capital in the head of Earned Capital then our profit figure will be overstated and financial statements will lose their validity. Similarly, if Earned and Paid-in Capital are shown as an Investment, then assets will become overstated and again the financial statements of a company will lose their validity. These were the reason why we keep Earned Capital separate from Paid-in Capital. (2003)
Both Earned and Paid-in Capital are important at their own place. Without either of them, the company cannot thrive or operate smoothly. No business can setup without the investment by shareholders or owners, similarly, no business can continue to exist unless it earning decent rate of profits. Therefore, both are really important for the formation and smooth running of the business. However, looking at both of them critically, one can state that it is the Paid-in Capital that is more important because only after a business is setup, it starts earning profit. So, without Paid-in Capital there would be no Earned Capital and hence Paid-in Capital has some merits over Earned Capital. Another reason for the importance of Paid-in Capital is the fact that a business can bear losses for some period and may continue to exist on Paid-in Capital. We can conclude that both Earned Capital and Paid-in Capital are equally important, but it is the Paid-in Capital which gets the lead out of the two.
According to Wachowicz, Basic Earning is the simplest method to find out the earning per share that a firm has made over its outstanding shares. It is calculated by dividing net profit with number of shares outstanding. For e.g., suppose that a company earns a profit of $5 Million in a fiscal year. It has currently 10 Million Shares issued to shareholder. Its basic earning in this case ...Download file to see next pagesRead More
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