Owners' Equity

Owners' equity
One of the categories presented on the balance sheet is the stockholders’ equity, which “is the stockholders’ claim on the assets of the business” (Weygandt, Kieso, & Kimmel, 2005, p. 13). The section of the stockholders’ equity encompasses capital stock, additional paid-in capital, and retained earnings (Kieso, Weygandt, & Warfield, 2010, p. 744). It is essential from an economic as well as a legal point of view to distinguish between paid-in capital and earned capital because the sources of funding differ.
Paid-in capital
Stockholders choose to invest assets – most commonly cash - in the corporation providing funds to support business operations. Capital stock and additional paid-in capital represent capital contributed by stockholders in exchange for shares of common or preferred stock. Amounts paid in over par or stated value and paid-in capital from treasury stock is recorded as additional paid-in capital, whereas stated capital is the par value of the shares (Kimmel, Weygandt, & Kieso, 2005, p. 548).
Earned capital
Earned capital or retained earnings represent capital earned by a company as a result of business operations less paid-out dividends. “Earned capital consists of all undistributed income that remains invested in the company” (Kieso, Weygandt, & Warfield, 2010, p. 744). Companies often use a percentage of the net income as retained earnings to reinvest into the company to support development and growth. A net loss occurs when expenses exceed revenues; in this case the net loss is debited to retained earnings. If the net loss exceeds the beginning retained earnings, it may result in negative retained earnings and is recorded as a deficit.
For investors it is more important to concentrate on the amount of earned capital because it represents profit generated through business operations, whereas paid-in capital is generated through the sales of stocks. Studying retained earnings also gives investors an informative overview how well...