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LESSON 11,12 Accounting of Equity

Lecturer Rodica BLIDIEL, PhD

Learning Objectives:
Explain the structure of the equity

Explain what are the equities Explain the accounts used to record the equities Explain the main transactions and records with equities

Equity structure:
Share capital Premium related to capital Revaluation reserves (differences) Reserves (from profit) Conversion reserves Retained earnings Profit (loss) for the period

BALANCE SHEET
Assets Liabilities

INCOME STATEMENT
Revenue

Expenses

Equity

Profit
Debit Credit

or Loss

COURSE - Framework:

1.3. Accounting of the revaluation reserves (differences) 1.4. Accounting of the reserves (from profit)

BALANCE SHEET
Assets Liabilities

INCOME STATEMENT
Revenue

Expenses

Equity

Profit
Debit Credit

or Loss

1.3. Accounting of the revaluation reserves

Definition
= Pluses or minuses of the assets value resulting from the revaluation of tangible assets.

Revaluation reserves = fair value - net book value.


Also, the revaluation of the property, must set a new time of use (useful life) and consequently a new depreciation.
Fair value is based on assessments conducted by qualified personnel in evaluation, members of a professional body in the field, nationally and internationally recognized.

1.3. Accounting of the revaluation reserves

ACCOUNTS
105 Revaluation reserves
DEBIT CREDIT

transfer to reserve (106); - decrease value resulting from the revaluation of tangible assets (211, 212,
213, 214).

Increased value resulting from the revaluation of tangible assets (211, 212, 213, 214).

= revaluation reserves of tangible assets.

1.3. Accounting of the revaluation reserves


Example
A company owns a building with a book value amounting to 180.000 lei, its useful life is 10 years. After two years the building was revalued, its new value is 240.000 lei. Requirements: Calculate and record the transactions regarding the building revaluation.

1.3. Accounting of the revaluation reserves


Net book value =180.000 lei-36.000lei=144.000lei 240 000 lei revalued value Reserves (differences) from revaluation 96.000 lei

2812
Depreciation of buildings

= =
=

212
Buildings

36.000 lei

212
Buildings

105
Revaluation reserve

96.000 lei

Revaluation reserve

Buildings

+ Depreciation

1.4. Accounting of the reserves (from profit)

Definition
Benefits sustainable affected by the business. They are formed mainly from the positive results achieved by the enterprise, but may have other sources, such as premium related to capital, revaluation reserves.

1.4. Accounting of the reserves (from profit)


Types of reserves
1061 Legal reserve 1063 Statutory or contractual capital reserve 1064 Fair value reserve 1065 Reserve representing the revaluation reserve suplus 1068 Other reserves

1.4. Accounting of the reserves (from profit)


Legal reserve fund from profit (MANDATORY)
- many legislations require creation of the fund as a percentage of profits (in Romania 5% from profit but no more than 20% of share capital) Main purpose: capital protection where the financial year ending loss.

1.4. Accounting of the reserves (from profit)


Statutory or contractual reserve
- is established annually from the net profit in accordance with the decision of general meeting of shareholders. Main purpose: - to temper the shareholders desire to ask dividends in turn of investments for the company.

1.4. Accounting of the reserves (from profit)


Other reserves
- established at the proposal of the Board of Directors or general meeting of shareholders to cover the loss.

1.4. Accounting of the reserves (from profit)

ACCOUNTS
106 Reserves
DEBIT CREDIT

Decreasing value of reserves.

Increasing value of reserves.

= existing and unused reserves.

1.4. Accounting of the reserves (from profit)


Example
A company obtained a financial year gross profit of 10,000 lei. General meeting of shareholders decided the distribution of profit as follows: 5% to legal reserves, other reserves 3.000 lei, the remained profit being carried forward for the next year. Income tax is 16%. Requirements: Calculate and record the transactions.

1.4. Accounting of the reserves (from profit)


Accounting income = Revenues - Expenditure Taxable income = Accounting income - Tax deduction (expenses) + Tax exemption (income) Tax on taxable income = Taxable income * 16% Gross profit =10.000 lei Income tax 16% Legal reserves = lei Taxable income =.lei Income tax = .lei Net profit = lei Other Reserves = 3.000 lei Retained earnings = ...lei

1.4. Accounting of the reserves (from profit)


Accounting income = Revenues - Expenditure Taxable income = Accounting income - Tax deduction (expenses) + Tax exemption (income) Tax on taxable income = Taxable income * 16% Gross profit =10.000 lei Income tax 16% Legal reserves = 10.000 * 5% = 500 lei Taxable income =10.000lei - 500lei= 9.500 lei Income tax = 16%* Taxable income = 9.500lei * 16%=1.520 lei Net profit = 10.000-1.520 = 8.480 lei Other Reserves = 3.000 lei Retained earnings = 8.480 lei - 3.000lei - 500lei = 4980 lei

1.4. Accounting of the reserves (from profit)


129
Profit appropriation

% 1061
Legal reserve

8.480 lei 500lei 3.000lei 4.980lei

1068
Other reserves

1171
Profit/loss carried forward

???

Questions

1. Define the revaluation reserves?

2. Which is the difference between revaluation reserves and reserves from profit?

3. Which are the mandatory reserves? Why?

Bibliography:
1.
2.

3.

4.

Libby R. & colab.- Financial Accounting, McGrawHill Irwin Prentice Hall, International Edition, New York, 2009. Istrate C. Accounting is not only for accountants! (Contabilitatea nu-I doar pentru contabili), Universul Juridic Prentice Hall, Bucharest, 2009 (Romanian version), pg. 111-117; Trif V., Blidiel R. - Financial Accounting, Eurostampa Prentice Hall, Timisoara, 2007. (Romanian version). OMFP 3055/ 2009.