What is the difference between paid-in capital and retained earnings?

Answer 1

Paid-in capital is the money that investors have invested in the corporation. It consists of the common stock or preferred stock accounts (generally at par or stated value) and an account for paid-in capital in excess of par or stated value (for the excess of the market price of the stock over its par or stated value). Note that if the stock has no par or stated value, the full market price received will be in the common or preferred stock account.

Corporations distribute profits to their stockholders by issuing dividends. (Dividends are not expenses, but profit distributions.) The retained earnings account contains the corporation's total net income, since it was started, that has not yet been distributed as dividends (i.e., accumulated net income - accumulated net losses - accumulated dividends). Therefore,

Beginning retained earnings + Current year net income - Current year dividends = Ending retained earnings