Monday, July 18, 2011

Paid in Capital and Retained Earnings

Paid in capital and retained earning both are the different section of shareholder’s equity in balance sheet. This difference is important from both an economic and a legal point of view. Paid in capital represented the amount which an investor pays for the stocks of any company. This amount represents the ownership of the investors (Kimmel, Weygandt & Kieso, 2008). Paid in capital is also referred to as contributed capital. It represented the amount of stockholder which they contributed in an organization asset. It is important part of the balance sheet as it shows par value of company’s stock which has issued.

On the other hand retained earning represents earning of an organization after distribution of dividend to their stockholder. This represents only that amount which is generated by firm by its operation. This does not include any amount of shares issued. Retained earnings show the amount which is not distributed among shareholder but is retained in the business itself.

The basic reason is to separate both these sections is to find out clear difference between inputs of stockholder and capital generated from company’s operation (Bierman & JR, 2009). Company’s also legally bound to show both in different section. It is necessary to show share amount and earning of company separated. These both account shows separated so that investor and the corporate itself find out the earning on their stock which they have issued. Paid in capital represented the amount of stocks that company has received from their investor. By retained earning investor can find out the performance of company. This separation is also important for company itself as it tracks its overall performance of their operations.

Bierman, H. & JR. (2009). An Introduction to Accounting and Managerial Finance: A Merger of Equals. Singapore: World Scientific.
Kimmel, P.D., Weygandt, J.J. & Kieso, D. E. (2008). Accounting. USA: John Wiley and Sons.
Warren, C. S., James, M. R. & Duchac, J. E. (2008). Financial and Managerial Accounting. USA: Cengage Learning.