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Owner's Equity Case

Essay by   •  March 9, 2015  •  Essay  •  592 Words (3 Pages)  •  507 Views

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Owner's Equity is important in any business. Keeping track of this equity is also important. This paper will explain the importance of keeping paid in capital separate from earned capital. As will s which of these two are more important. The paper will also discuss whether basic or diluted earnings per share are more important to investors.

Both paid in capital and earned capital are important to investors. This capital is tracked and shown in the shareholders equity section of the balance sheet. The need for separation of the two is due to how the capital is obtained.

Paid in capital is money that was initially invested in the company when shares in the company were first offering them. This investment is considered stock purchased in the primary market, and it is separate from stocks that are offered in the open or secondary market. The face or par value of the stock is what the value of the stock currently is. This value is not always what an investor will pay. Sometimes the stock is worth more to an investor because of the opportunity to have the stock price rise, and to make a profit.

Earned capital is the portion of the net income that is added to equity. This capital is shown on the balance sheet as retained earnings. These retained earnings increase the value of the company's stock. A company also has an option to pay dividends are paid then the value of the dividends are subtracted from the net income prior to the dollar amount going onto the financial statements.

Paid in capital and earned capital are dollar values that are owed to the owners of a company. Both of these accounts are of value to an investor. These accounts show the dollar values that any investor would be interested in. The value and the income of the company, which can be viewed by these numbers, have value to the investor. By comparing this information an investor can decide if they would like to continue to invest in the company. Viewing both of these accounts hold a significant value for an investor, and investors would feel that both values hold equal importance in the decision.

There are two ways to measure the value of a company's stock, earnings per share and diluted earnings per share. Earnings per share are the value of each share of common stock of a company, and serves as an indicator of a company's profitability. Diluted earnings per share also give the value of each share of stock in

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