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Paid in Capital is the amount of investment a shareholder has contributed to the business for use and earned capital is the amount of profit that has been generated by the business itself. It must be separate for investor and shareholder information so that the difference between the two can be clearly stated.

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16y ago
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11y ago

Paid-in capital is the funding provided to a firm from the sale of capital stock(common, preferred shates); while earned capital is money that the firm earns as a result of profitable operations(income). It is important to keep these two forms of capital separate because they represent to distinctive sources of funding. Paid-in capital represents new money intended to aid the firm in increasing their earned capital. Earned capital represents the firm's profits from operations. To combine the two would misrepresent the earning potential from operations

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Q: Why does paid in capital and earned capital need to be kept separate?
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