The capital of an enterprise is the aggregate of funds that an enterprise can dispose of in order to carry out its activities for the practical purpose of making a profit.
According to the source of the formation of assets, own and borrowed capital is allocated . The main role in this is played by the own part of assets, which ensures the economic independence of the organization.
The equity of the enterprise reflects the total value of the assets owned by the enterprise on the right of ownership and free to use in the formation of part of the assets. Own part of the total capital represents the net assets of the company or organization.
The equity of the enterprise includes various sources of resources: authorized, reserve, additional capital. In addition, it includes retained earnings, separate special purpose funds and other reserves. In addition to its own funds include all gratuitous receipts and subsidies allocated by the state.
The amount of the authorized capital is prescribed in the charter and other constituent documents of a legal entity. Additional - this is all property contributed by the founders in excess of the charter, as well as the amounts remaining as a result of the revaluation of the property, and other income. The reserve is allocated from profit to cover possible losses and losses.
The main source of accumulation of property of the enterprise is retained earnings remaining from gross profit after payment of taxes to the budget and deductions for other claims.
Special purpose funds represent net profit, which is used to expand the enterprise, industrial development, and social events.
Other reserves mean reserves created in connection with the expected large expenses, which are included in the cost, as well as all distribution costs.
The equity of the enterprise is divided into two key components - it is invested and accumulated capital.
Invested part - funds invested by the founders (owners) in the enterprise. It includes the nominal value of shares (ordinary and preferred) and additionally paid assets. This also includes values received free of charge from various sources.
In the balance sheet, part of the invested funds is reflected as authorized capital, part as additional (received share premium), part as additional (free or transferred property) or social fund.
Accumulated part - funds created in excess of initially advanced by the owners. This part is reflected in the articles arising from the distribution of net profit (these are retained earnings, reserve capital, and other similar items).
The equity of the enterprise has the following positive features:
- ease of attraction (it depends on the owners and does not require coordination with other business entities);
- high profit generating opportunities (does not require payment of loan interest);
- ensuring the financial stability of the organization in the long term and reducing the risk of bankruptcy).
However, it also has disadvantages:
- limited volume of fundraising;
- high price in comparison with borrowed sources;
- unused probability of increased profitability due to borrowed funds.
In general, an enterprise using exclusively equity capital is the most financially stable, but the pace of its development is restrained due to the non-use of the opportunities for profit growth for funds invested in fixed assets of the enterprise.