Equity in the balance sheet reflects the flow of funds such as contributions from shareholders, additional capital and profit. Its value can constantly change. At the initial stage, when the company is just being formed, it has one source of financing - the contributions of the founders.
Consider equity in the balance sheet as an example of one of the most complex forms - AO. Joint-stock companies have an additional source of equity. It is not available to LLC, IP and other forms. AO has the right to issue shares. The company's charter stipulates in advance the amount by which it can create these securities. But usually AO does not issue shares for all this value at once. The balance sheet shows the amount by which the share capital has already been paid. As soon as the issue of new shares occurs, the carrying amount of capital increases by the amount of the nominal value. But this amount does not always increase. Equity in the balance sheet decreases if the joint-stock company begins to repurchase its own shares. Its amount is reflected in the liabilities section. Shareholders invest their funds in the organization’s shares, that is, they give a loan as if. But at the same time, investors become co-owners of the company. A shareholder has every right to resell a security, but cannot return it to the organization.
So, the sources of equity in the balance sheet are reflected in the “liabilities” section. Consider what income, not related to commercial activities, may still be with the company.
- share premium - the difference between the share price and the value at which it was sold;
- additional capital - the amount that the company receives from the sale of its own assets at an inflated price or from the acquisition of the assets of another company at a lower cost;
- random gifts in any form: property, cash and other.
Equity in the balance sheet also reflects part of the organization’s profit. When a joint-stock company receives net income, it pays dividends from it to its investors. The profit remaining after this is used to increase equity.
How else is equity reflected in the balance sheet? The line “Reserve capital” indicates the amount of retained earnings that is earmarked for earmarked expenses. The firm must create such stocks. In this case, the tax law provides for a number of benefits. Provisions are made from the proceeds. The funds from this article are used to upgrade fixed assets, to cover various losses, losses, etc. The size of the reserve is determined by the management of the company and depends on the situation prevailing in the organization at the moment. That is, if in the near future the company may suffer certain losses in connection with some risks, then the founders decide to allocate a certain amount for insurance.
The “Equity” section also includes the following lines of balance:
- additional capital. It reflects the value of assets that the organization received free of charge. If a company buys shares for a price higher than the nominal, the difference also applies to this section of the balance sheet;
- undestributed profits. This is the income that the company has received since the beginning of its activities minus dividends, losses, various capital expenditures;
- adjustment for revaluation of assets. The amount of increase or decrease in the value of assets owned by the enterprise;
- exchange rate differences on transactions related to the purchase or sale of foreign currency;
- set of expenses and income. This is an account opened on time. It contains the sum of all profits and costs before translating them into the line “Net profit” or “Retained earnings”.
The entire cost of equity is indicated in the third section of the balance sheet. The larger it is, the more stable the position of the company.