Accounting (Basics) - Lecture 9 ACCOUNTING CONCERNING EQUITY OF ACCOUNTING UNIT. CHANGES IN EQUITY, CAPITAL FUNDS, PROFIT FUNDS, ACCUMULATED PROFIT OR OUTSTANDING LOSS FROM PREVIOUS YEARS AND LOSS/PROFIT FROM THIS ACCOUNTING PERIOD. Content nAccounting concerning equity of accounting unit nChanges in equity, capital funds, profit funds nAccumulated profit or outstanding loss from previous years and loss/profit from this accounting period. 2 Equity nFor all users of accounting information, it is vital to determine the amount of equity and long-term liabilities of the business. nThis information shows clearly what portion of assets is backed by its own resources (investments of founders and generated profit) and what portion is funded from long-term liabilities (mostly loans and allowances). n 3 Equity nThis includes all resources available for the business for over one year. nThe amount of these resources affects the stability and long-term growth. nAs such businesses are regarded stable when they have long-term resources (own and foreign) covering the value of long-term assets (fixed assets) and/or of a portion of short-term assets (current assets). n 4 Equity nEquity is accounted in group of accounts Capital accounts, sub-divided into these groups: n qRegistered capital and capital funds qReserve, indivisible fund and other funds created from profit and transferred business result qBusiness result qAllowances 5 Equity nTypical of equity accounting is its dependence on the legal form of the entity. nThis is why its basic division and relationship between the legal form and accounting methods for separate equity components is mentioned first. nFrom the above perspective, entities can be divided into natural persons and legal persons. 6 Equity nNatural persons account equity mostly when entered as entrepreneurs in the business registry. nLegal persons are divided into three groups in terms of equity accounting: qBusiness firms, qAssociations, qState enterprises and other entities in which equity components are created 7 Business firms nBusiness firms are legal persons established for business divided into four basic types: njoint stock company nlimited liability company nunlimited liability company nlimited partnership n 8 Registered capital nRegistered capital means the collection of all monetary and non-monetary investments (that can be valued with money) by the partners into the business firm, by associates into the association or by the founder into the state enterprise. n 9 Founding date nFounding date = date of signing the articles of partnership, deed of foundation, etc. nSetting up a business is related with a number of different tasks mostly of the legal nature and lots of organisation, within which assets and resources already start moving. nTo be more specific, registered capital is subscribed, parts of liabilities redeemed, monetary expenses needed for formulating agreements, verifying signatures, etc. 10 Formation date nFormation date = date of entering the company in the business registry. nSince the formation date, the entity is obliged to keep accounting. nIt is as of this date that the opening balance sheet is prepared. nIn this opening balance sheet the full amount of registered capital is accounted on account Registered capital. n 11 Accounting of subscriptions and registered capital pay-back nRegistered capital is invested into the business in two phases: qSubscription where subscribers commit to invest certain capital into the entity. Straight upon subscription, the subscriber becomes the owner of the respective share in the company’s assets. For the entity a receivables from the subscriber arises who is responsible for the liabilities of the company in the amount of subscribed, unpaid capital. qPay-back of subscribed capital represents the actual investment of monetary and non-monetary contributions into the company. n 12 Accounting differences in registered capital nBusinesses may change the amount of registered capital during their lives. nIn capital companies, however, it must not drop below the minimum line set by the law. 13 Accounting differences in registered capital nIncrease in registered capital in a joint stock company may proceed in multiple ways always subject to the general board decision: qthrough subscription of new shares, qthrough a transformation of issued bonds into shares, qfrom other own resources – capital funds, retained earnings from previous years, current period earnings, etc. n 14 Increase in registered capital nIncreases in registered capital on subscription are credit to account Changes in registered capital and debited from account Receivables for subscriptions. n 15 Increase in registered capital nIn limited liability companies registered capital may be increased: qthrough further monetary and non-monetary investments by partners, qfrom other own resources – capital funds, retained earnings from previous years, current period earnings, etc. 16 Decrease in registered capital nDecisions on decreasing registered capital are made by General Meetings of business firms, usually due to dealing with long-term losses of a business. 17 Decrease in registered capital nCapital may be decreased in joint stock companies in the following way: qthrough decrease in the nominal (face) value of shares (for stock certificates by replacement or by marking lower nominal (face) values on original shares, which often used to be the case) qthrough withdrawal of shares from circulation (based on a public draft contract of share acquisition with the aim of their withdrawal or based on a lottery) qrefraining from issue of still unpaid shares n 18 Capital Funds nCapital funds are created from external resources, such as share premium, free-of-charge assets takeover, subsidies from the state budget and/or from similar resources, through asset re-valuation under legal regulations, received member shares in associations, etc. 19 Capital Funds nFor capital funds accounting, accounts in the following groups are set up: qShare premium qValuation differences from re-valuation of assets and liabilities qValuation differences from re-valuation on transformations 20 Capital Funds nThe share premium is the difference (surplus) between the issue price of shares and their nominal (face) value on the registered capital increase through the subscription of new shares. nIt also occurs in case of accounting non-monetary contributions of partners in a limited liability company – here it is the difference between the valuation of this contribution and the nominal (face) value of partner’s share. nThe share premium may be used for paying the loss from previous years and current accounting period and/or for increasing registered capital. n 21 Capital funds nOther capital funds are monetary and non-monetary contributions designed for boosting equity (not applying to registered capital and share premium). nThis account is used mostly for accounting received gifts and grants. 22 Capital funds nThese are specific examples of other capital funds: qgifts in the form of fixed assets, inventory, receivables and money, qmember shares in housing cooperatives, state subsidies, qspecial funds created from funds from profit, qinventory differences (surpluses) for fixed non-depreciated assets. n 23 Funds Created From Profit nFunds created from profit are accounted on qReserve funds qIndivisible funds qStatutory funds qOther funds n 24 Funds Created From Profit nThe reserve fund might be created, as required by the law, on an obligatory basis from the net profit or without the requirement of the law. n 25 Funds Created From Profit nThe creation and use of statutory funds is subject to the memorandum of partnership and/or articles. nOther funds are created by entities based on the decision of the general meeting, board of directors and in the course of the accounting period by corporate management. nDetailed analytical accounts must be kept with these funds, including the way they are used. n 26 Business result of Entity nPart of registered capital is the business result - making profit is, from the long-term perspective, the basic prerequisite for the existence of companies. nThe business result is tracked in the books in two items: qas the business result of current accounting period qas cumulated business result from previous years 27 Business result of a current accounting period nThe business result of a current accounting period is the net business result after income taxes. nIt is profit or loss from operations in the accounting period that has just ended. nIts allocation is subject to an approval procedure of the company’s or association's general meeting to be held several months after the accounting period has closed. 28 Business result of a current accounting period nWhen accounting starts in a new accounting period, this business result, as determined, is transferred from account Opening balance sheet account through correlative posting to the account Business result. n 29 Business result of a current accounting period nAccounting on this account then proceeds following the decisions of the General Meeting: qAs profit is allocated (in equity companies), the first decision is made on the creation of the reserve fund, after that profit may be used for paying dividends to shareholders, bonus for the members of the Board of Directors and Supervisory Board, for creation of statutory funds and other funds and/or for an increase in registered capital. 30 Retained earnings from previous years nAccounting on this account then proceeds following the decisions of the General Meeting: qShould a portion of profit remain undivided, it is transferred to account Retained earnings from previous years 31 Business result of a current accounting period nIf the company made a loss, the General Meeting may decide to pay this loss from the funds created, from transferred business result, on the duty of partners to pay the loss (emergence of a receivable from partners) and/or on covering the loss by reducing registered capital. nIf no decision has been made on the loss, the loss is also accounted on the account Accumulated losses from previous years. n 32 Business result of a current accounting period nAccount Business result must be balanced as of the accounting period end, must not show any balance and hence does not appear in the balance sheet. nIf the entity made a loss over the previous year, it may pay the loss from the current period profit. nIf it made a loss in the current period and has retained earnings from previous years, it may use these earnings to cover such a loss. n 33