What is Paid-In Capital?

Paid-in capital is a component of a company’s equity, and contains the amounts received from investors when they buy shares directly from the company. The amount in this account is that portion of the price paid to the issuing entity in excess of the par value of the shares purchased. When investors buy these shares from other parties (frequently through a stock exchange), the amounts paid do not go back to the company, and so have no impact on its paid-in capital account.

What is Retained Earnings?

Retained earnings is a component of a company’s equity, and contains the cumulative total of all profits generated by the company since its inception, minus any dividends paid out to shareholders. This amount is generally considered to have been reinvested in the business, though it may be held in an investment account for future uses, such as a prospective future acquisition. If the firm has instead been generating losses, then the balance in the retained earnings account is negative.

Comparing Paid-In Capital and Retained Earnings

The key differences between paid-in capital and retained earnings are as follows:

Type of account balance. The paid-in capital account cannot have a negative balance, while the retained earnings balance can be negative; a negative balance can arise when a business incurs losses.
Source of funds. Paid-in capital is being paid into the business by investors, while retained earnings have been generated internally by the business itself.