W1 Owners’ Equity Paper

W1 Owners’ Equity Paper - 1 Owners Equity...

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1 Owners’ Equity Paper Owners’ Equity Paper Brandi Murobayashi ACC 423 August 22, 2011 Tommy Huntsman
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2 Owners’ Equity Paper Owners’ Equity Paper Why is it important to keep paid-in capital separate from earned capital? It is important to keep paid-in capital separate from earned capital because they represent two different types of income. Paid-in capital represents the amount of money that owners invest into the company as opposed to earned capital, which represents the excess profits of the company (Keiso, Weygand, & Warfield, 2007). If paid-in capital and earned capital were reported together, the company may appear to be more profitable when in actuality the income may be coming from owner contributions. Another reason why it is important to keep paid-in capital separate from earned capital is for compliance purposes. Dividends may be declared out of retained earnings in all states however; in many states dividends are not allowed to be declared out of paid-in capital (Keiso, Weygand, & Warfield, 2007). As an investor, I would not want my dividends to be declared out of paid-in capital because dividends are declared when the company has
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W1 Owners’ Equity Paper - 1 Owners Equity...

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