Earned Capital

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

balance sheet, owner's equity, net income, dividends payable