Owner’s Equity Essay Example

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Accounting
Owner’s equity is the amount of capital that the owner invest in the business or the company. Owner’s equity is important for every business and this allows the owner to control a significant percentage of the business if not 100 percent of the business. Owner’s equity also comprise of paid in capital and earned in capital.
Paid in capital and earned capital are considered as equity but they are two forms of equity. Paid in capital is the same as contributed capital that is provided by investors after they purchase a company’s shares that have been issued initially. Earned capital is categorized under retained earnings, this is an accumulation of income that a company earns since the date of its inception. So, why should paid in capital be separated from earned capital? This is because paid in capital brings income from selling shares that are initially issued by a company. One reason for separating paid in capital from earned capital is for the issue of legal capital, retained earnings and dividends distribution. Legal capital is known as the per value capital, which is the original amount of the paid in capital. Also paid in capital is used to measure the profits that is made in the company. Earned capital on the other hand can be reinvested into the company to become retained earnings or it could be paid as dividends to shareholders. Also, retained earnings (earned capital reinvested) should be separated from capital that is contributed for the purpose of tracking income that has accumulated over time.
Paid in capital and earned capital are all important parts of equity but which one do investors find significant? Paid in capital share equal importance to earned capital and every investor has different goals. Paid in capital reflect the amount of capital raised through equity which basically means how much capital the owner contributed to the company. Investors are interested in this because the want to see the liquidity of capital in the company and how much the owner of the company is willing to contribute to make sure the company doesn’t fail. If paid in capital is little investors see as the company as one about to fail so the owner is trying to put money in the business or company to save it. Also, paid in capital is showed on the balance sheet and investors are always interested in the financial statements of companies. Earned capital are derived through company operations such as selling products. Earned capital is important to investors because that’s what they use to determine how much the company pays dividends to shareholders. Investors are interested in dividends because they are interested in the returns of their investments. Paid in capital and retained earnings are both important to investors. Investors who are interested in the financial health of the company focus on paid in capital whiles investors that are interested in the yield of their returns focus on earned capital to estimate their dividends.
Earnings per share (EPS) is one of the common terms found in accounting or finance. This is popular used by investors, analysts and many other people who are interested in investing in a company. There are two types of EPS there is the basic EPS and diluted EPS. So, which one do investors find important? Basic EPS is when the company divides profit it has earned over a period of time by the average number of shares of stock it has issued. This makes it easier for investors to calculate the earnings they will receive per share sold by the company. Diluted EPS is when the company divides profit over the average number of shares, but in this type of EPS the shares are adjusted to include shares that may be issued in the future. This is the only difference between basic and diluted EPS. Many investors are conservative and they use both basic and diluted EPS to calculate the worth of the shares of the company. Investors look at the rate of return and the growth rate and EPS is what they use to figure that out. Also, investors are find basic and diluted EPS important because of dividends. Dividends are paid from profits that are earned by the company. Investors that are interested in dividends use EPS to measure the dividends payments of the company. For instance is the EPS of a company is $1.00 investors can calculate the dividend payments and measure the worth of investment. Many investors prefer using diluted EPS because it takes into account not only the shares that are issued, but also the ones that maybe issued in the future. Investors also prefer diluted EPS because they are more accurate and a precise way of calculating eps. Diluted EPS makes it easier for investors to determine which companies they want to invest in.

References

Kennon, J. (n.d.). Basic EPS and Diluted EPS in the Stock Market. Retrieved February 25, 2015, from http://beginnersinvest.about.com/od/investingglossary/a/basic-EPS-diluted-EPS-definition.htm