Definition
Also known as retained earnings, the financial accounting term earned capital is the value of the assets accumulated through the profitable operation of a company. Earned capital is credited to retained earnings, and can be found in the owner's equity portion of the balance sheet.
Calculation
Earned Capital = Beginning Retained Capital + Net Income - Dividends
Explanation
Earned capital is different than the related concept of paid-in capital. The source of earned capital for a company is net income. If there is sufficient net income after paying dividends, the company may decide to keep earned capital in the form of retained earnings.
Companies will retain capital if they believe they can reinvest these earnings back into the business to create additional profits. If a company does not believe it has sufficient opportunities for new investments, it will return all, or a portion, of net income back to shareholders in the form of dividends.
Example
Company A's starting balance in retained capital was $25,995,000 and net income was $4,283,000. From these earnings, the company paid a dividend of $1,555,000. The current balance in retained capital would be:
= $25,995,000 + $4,283,000 - $1,555,000, or $27,732,000
Related Terms
Also known as a statement of financial position, the balance sheet is used to show the financial health of a company at a particular point in time. The balance sheet consists of assets, liabilities, and owner's equity in the company. It is one of the four key financial statements issued by public companies.
Moneyzine EditorNovember 6th, 2024- The financial accounting term owner's equity is used to describe the resources that are owned by the common and preferred stock shareholders of a company. Owner's equity is reported on a company's balance sheet.Moneyzine EditorNovember 6th, 2024
- The financial accounting term net Income is used to describe a measure of a company's profitability. Net income is a line item appearing on the income statement, and is derived by subtracting expenses from revenues.Moneyzine EditorNovember 6th, 2024
The financial accounting term dividends payable is used to describe the cash owed by a company to its stockholders, based on a distribution that has been formally authorized by the company's board of directors. Dividends payable are categorized as a current liability on the company's balance sheet.Moneyzine EditorNovember 6th, 2024
