Earned Capital Definition
Earned capital is a company's net income, which it may elect to retain as retained earnings if it does not issue the money back to investors in the form of dividends. Thus, earned capital is essentially those earnings retained within an entity.
Earned capital is negative if a company is recording losses, and is positive if the company is generating profits and has not issued all of the profits as dividends. If a company is generating profits and has issued all of the profits as dividends, the amount of earned capital is zero.
A growing company needs all of the cash it can get to fund growth, and so rarely issues dividends. Such companies will likely have large earned capital balances, as long as they are generating profits. Conversely, a low-growth company in an established industry is more likely to issue dividends, and so will retain a smaller proportion of earned capital.
Earned capital is not the same as paid-in capital. Paid-in capital is the amount of funds paid into the company by investors (above the par value, or stated value, of the stock). Thus, earned capital comes from profits, and paid in capital comes from investors.
Earned Capital Example
ABC Company records $100,000 of net income, and issues $60,000 of dividends to its shareholders. This leaves $40,000 of earned capital, which appears in the retained earnings account.