Question:-Why is the distinction between paid-in capital and retained earnings

important?
Answer
Step 1: Definition of Paid-In Capital
Paid-in Capital can be defined as the money that investors invest during stock
issuances, which includes both the par value of the shares as well as amounts over the
par value.
Step 2: Definition of Retained Earnings
An organization's retained earnings are the profits left over after they have deducted
their direct expenses, indirect expenses, income taxes, and dividends to shareholders.
Step 3: Distinction between Paid-In Capital and Retained Earnings
From both a legal and an economic point of view, it is important to distinguish between
paid-in capital and retained earnings.
The legal right to declare dividends out of retained earnings is available in all states, but
out of paid-in capital is not allowed in many states.
A corporation's continued existence and growth are determined by its earnings, which
are seen by the management, stockholders, and others.