Each organization should have its own capital, which consists of investments of participants and founders, as well as loans from partner organizations or reserve funds in bank accounts. And if the total amount of credit money exceeds the invested funds, then the capital is negative, which adversely affects business relations, because few partners want to enter into transactions with an organization that has negative capital. The surest way to increase your own capital and turn it into a positive one is to make a contribution to the general funds of the company in the form of retained earnings, which was generated during the reporting period.
The concept of capital and reserves
Under capital should be understood as the amount of own and borrowed funds of the enterprise.
Under own capital understand the monetary value of the property of the company, which is in its ownership.
Equity and reserves in the balance sheet is an information block that consists of 7 lines.
When calculating equity capital, they receive the difference between the value of all property in the balance sheet (assets of the company) and the obligations of the company.
Any financial and economic activity requires constant investment. Investments are required for investments in order to maintain and expand the production process and increase its efficiency, and to introduce innovations. One of the main tasks of financial management is the development of the investment budget, support and optimization of investments to attract financial resources, optimization of capital structure.
The choice of sources of financing is influenced by various factors, including the industry and the scale of the enterprise, technological features of the production process, specification of products, work with banking institutions, reputation in the market, etc.
The structure of the “Capital and reserves” section of the balance sheet used by the enterprise is determined by all financial assets that have an active impact on the final result of the company. It affects the indicators of return on assets and assets, forms the ratio of profit and risk in the process of development of the enterprise.
The financial structure of capital and reserves in the balance sheet is the structure of the main sources of funds, i.e., the ratio of equity to borrowed capital.
The financial capital of the enterprise consists of its own and borrowed.
The balance sheet item “Capital and reserves” in the form of equity capital consists of the cost of the authorized, reserve and additional capital. In addition, it includes the value of retained earnings derived from the conduct of business activities. Debt capital is accounts payable of an enterprise to individuals and legal entities, including banks.
Provisions are an assessment and clarification of certain articles of an enterprise accounting aimed at covering expenses and payments due.
Differences between equity and borrowed
Own and borrowed capital can be distinguished from each other in a number of ways. Equity (and reserves in the balance sheet) are funds that are characterized by the characteristics given in the table.
| Sign | Equity | Borrowed capital |
| The right to participate in management | there is | Not |
| Risk attitude | Decrease in financial risk due to increase in share | Increased risk with increasing share |
| Profit opportunity | On the basis of the remainder | First of all |
| Priority of satisfaction of creditors' claims | On the basis of the remainder | First of all |
| Payment and Return Terms | Not installed | In loan agreement |
| Direction of financing | Non-current assets | Current assets |
| Tax cut option | Not | there is |
| Sources of financing | Internal and external | External |
| The relationship of owner’s income with firm performance | Direct link to company results | No connection |
World practice shows that the most “cheap” source is debt financing, since lenders are in a more privileged position than the owners of the enterprise. They reserve the right to return their investments, and in the event of bankruptcy, their claims will be satisfied before the claims of the shareholders. Nevertheless, uncontrolled growth of debt financing can significantly reduce the financial stability of the enterprise, lead to a fall in the market price of its shares, and in case of adverse events put the company at risk of bankruptcy.
How reflected in the balance sheet?
The balance sheet section “Capital and reserves” reflects the company's own sources of financing. This section includes the items below.
| Indicator | Line code |
| Registered capital | 1310 |
| Own shares | 1320 |
| Revaluation of fixed assets | 1340 |
| Extra capital | 1350 |
| Reserve capital | 1360 |
| retained earnings | 1370 |
If the company uses simplified reporting, the amount of capital and reserves in the balance sheet is a single line, reflected in one amount without a breakdown.
How is it filled?
The table shows the basic data on the composition and methods of calculating the indicators of the studied section of the balance.
| Indicator | Line code | Use of account data | Calculation Method |
| Registered capital | 1310 | 80 | K80 |
| Own shares | 1320 | 81 | D81 |
| Revaluation of fixed assets | 1340 | 83 “Additional paid-in capital” | K83 (revaluation amount) |
| Extra capital | 1350 | 83 | K83 (without revaluation surplus) |
| Reserve capital | 1360 | 82 "Reserve capital" | K82 |
| retained earnings | 1370 | 99 “profit and loss”, 84 “Retained earnings” | K99 + K84, D99 + D84, K84 - D99, K99 - D84 |
Information may be reflected at the reporting date, December 31 of the last year and December 31 of the previous year.
Registered capital
In the balance sheet “Capital and reserves” is represented by the authorized capital.
Under the authorized capital understand the amount of contributions of the founders in the development of the company at the very beginning of its formation. The minimum size of this capital is determined by law and is individual for each OPF. There are no restrictions for the maximum size. The size of the authorized capital of the company is clearly stated in the constituent documents of the company during its registration with the tax authority.
Own shares
Companies may reflect on this line the shares of participants acquired by the company for the purpose of transferring to other persons.
Own shares transferred to the company in the reporting year, for which the participant must pay its actual value in accordance with the financial statements for the reporting year, are reflected in the accounting reports at par value.
Revaluation
Once a year, commercial organizations have the right to reassess a group of similar fixed assets at current (replacement) value. The article “Revaluation of fixed assets” reflects the amount of increase in the value of non-current assets revealed by the results of their revaluation.
Extra capital
This type of capital reflects the cost of additional capital of the organization, excluding the amounts of revaluation of fixed assets.
Additional capital is formed from the following elements:
- share premium received as the difference between the selling price and the par value of a share;
- the difference in rates associated with payments by founders by deposits;
- the difference arising from the translation of the price of the assets and liabilities of the company used to conduct business outside the Russian Federation from rubles to foreign currency;
- contributions to company ownership;
- VAT refunded by the founder upon transfer of property as a contribution.
Reserve capital
Reserve capital may be compulsory in accordance with the law, which applies to joint-stock companies. A limited liability company may form this capital voluntarily in accordance with the charter.
The reserve fund of the joint-stock company is intended for the following purposes:
- cover losses;
- redeem company bonds;
- for redemption of shares.
retained earnings
It represents the final result of the organization in the form of net profit or loss after deduction of tax and other payments from profit. For example, tax fines.
The relationship between the asset balance, capital and liabilities of the company
Under the assets of the company understand the part of the balance sheet, which reflects the composition and value of the property of the company at the specified date. We can say that these are the resources controlled by the company based on the events of past periods, from which the company expects economic benefits in the future. An asset may result in potential future economic benefits when using the company's potential.
Under the obligations of the company understand the debt of the company on a specific date, which reflects the amount of expenses of the company, leading to the outflow of capital. Obligations may arise against the background of a firm’s contract with counterparties. Obligations are divided into terms for long-term (p. 1400) and short-term (p. 1500).
The asset balance, capital, reserves and liabilities of the company have the following interdependence:
K = A - O,
where K is the capital of the company, i.e.
A - assets, i.e.
About - the obligations of the company, i.e.
Conclusion
The liabilities of the balance sheet “Capital and reserves” include indicators that are able to show where the money came from in the company.
Capital is the funds invested by the founders in the formation of the company. In the future, it may be increased due to additional issues of shares. Therefore, the subject of replenishment of the capital of the company are the funds of shareholders. Unlike long-term and short-term obligations of the enterprise, capital is not borrowed, in the future there are no obligations to repay it. It is believed that the authorized capital is not returned to the founders. In fact, it can only be returned after the company is closed. However, its presence provides the company with the opportunity to operate and generate income, ensure profitability.