As an investor, is paid-in capital or earned capital more important? Explain why.
According to viewpoint from accounting, the money invested by the owner of the company is company’s equity and is made up of different parts, some being coming from the money owners directly and some coming from the profits of the company. The need of financing fulfilled from the issuance of the share which is paid in by investor as common or preferred stock is the paid in capital. It also may be referred as contributed capital.
On the other hand, additional paid-in capital is that which is included in contributed surplus account in the shareholders’ equity division of the balance sheet. The account shows the excess amount paid by investors over the par value of the stock issued (Investopedia, 2003).
Now the capital financed from the earnings of the company, on the other hand, is earned capital. It also may be known as retained earnings and is the portion of net income, which the firm has decided not to return to the shareholders as dividend but retain within the company for financing. Now this is the case when the company is making a profit. In contrast, if the companies is making losses, then the earned capital and hence the equity will be abridged by the amount of loss and the owners will face a decrease in the value of the wealth.
Now all these paid in capital and earned capitals are separated from each other for reporting purpose so that investing segment of capital can be distinguished from shareholders segment. Now the question here lies is, as an investor, what is more, important, paid in capital or the earned capital. For an investor, the earned capital becomes more of importance as this amount is another form dividend payout of the company out from retained earnings. The investors are more interested in it overpaid in the capital as they will receive a higher dividend if retain earnings are higher Budgeting (Money – The Nest, 2015).
