Financial Accounting 2.

Equity
Lecturer:
Madarasin Szirmai Andrea

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In the HAR BS
D) Equity (Class of accounts 41.th)
I. Issued (registered) capital (411.)
from this: repurchased own shares at nominal value
II. Issued, but not yet paid capital (-) (3. rd class of
accounts)
III. Capital reserve (412.)
IV. Retained earnings (Profit reserve, Accumulated profit
(413.)
V. Tied-up reserve (414.)
VI. Valuation reserve (417.)
VII. Net profit of the year (profit after tax) (419.)

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Classification
Elements of the equity

Fix part Changing (variable) part

- Issued (registered) capital
- Capital reserve
- Retained earnings
- Tied-up reserve
- Valuation reserve
- Net profit of the year =
(Profit after tax)

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Critical amount of the equity
(Act on Civil Code 2013/V.)
1. If an entitys equity is smaller than the minimum amount
of its issued (subscribed) capital for more than 2
consecutive years:
a) The members have to take steps to solve in 3 months
time after the approval of the financial statement
b) If a) did not happen: after the deadline in 60 days the
entity has to decide:
Transformation to that form of entity where there is no
limit on the amount of the issued capital, or the entity
can reduce its issued capital to a sufficient amount
On the termination without assign

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2. The members meeting shall be convened, if
At Plc: the equity is less than the 2/3 of the issued capital or
below the minimum defined in the law
At Ltd: the equity is less than the half of the issued capital

The owners have to make decisions:

-To make supplementary payments (at Ltd. It can be done, if it is
stated in the deed of foundation)
-Other possibilities to supplement the issued capital
-To reduce the issued capital
-Transformation of the entity
-Termination

The decree shall be implemented in 3 months.

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 Exapmle 1: supplement of missing equity
Previous
year Current year
D. Equity 1 950 1 450
I. Issued capital 3 000 3 000
II. Issued, but not yet paid capital
(-) 0 0
III. Capital reserve 0 0
IV. Retained earnings -50 -1 050
V. Tied-up reserve 0 0
VI. Valuation reserve 0 0
VII. Net profit of the year -1 000 -500

What are the possibilities to supplement the equity?

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Possible solutions

1. Increase the capital

2. Supplementary payment

3. Revaluation

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Accounting of Supplement payments
At the entity which receives supplementary payment
Dr 384. Bank account - Cr 414. Tied-up reserve
At the entity which transfer the supplementary payment
Dr 413. Retained profit reserve - Cr 384 Bank account
Supplementary payment paid back
Dr 414. Tied-up reserve - Cr 38. Bank account

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Calculation of dividend

1. Planned dividend: Working capital = Registered capital -

Registered, but not paid capital
2. Source of dividend: profit reserve
3. Modified equity
4. Maximum of dividend
5. Payable dividend

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Modified equity, Maximum of dividend

Maximum of dividend:39. (3):

Equity Tied-up reserve Revaluation reserve - Dividend
Issued Capital

Modified equity:
1. Equity Tied-up reserve Revaluation reserve - Dividend
Issued Capital
2. Dividend Issued, but not paid capital + Capital reserve +
Profit reserve + Profit after taxation

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Calculation of profit of the year

1. Case 2. case 3. case 4. case

Issued capital 10 000 10 000 10 000 10 000

Capital reserve 0 3 000 2 500 4 000

Profit reserve 3 000 - 3 000 4 000 -3 000

(retained earnings)
Tied-up reserve 2 000 2 000 2 000 2 000
Profit after tax 1 000 1 500 - 2 000 1 500
Issued, but not paid capital 1 500 0 1 500 1 500
Maxim. of dividend 2 500 0 3 000 0
payable

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Accounting of dividend

Dividend approved before of BS date (in rare cases):

Dr 413 profit reserve
Cr 479/458/459 Short term liability

Dividend approved after BS date:

NO book-keeping steps
Only in the notes: the amount of the approved dividend

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Example on calculation dividend
1. case 2. case 3. case 4. case
Maximum of
Planned dividend 1 6 9
dividend
Total source (profit
2 5 7 10
reserve)
Modified equity 3 4 8 0

Maximum of dividend

Dividend payable

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Example on calculation dividend

1. case 2. case 3. case 4. case

Maximum of
Planned dividend 1 6 9
dividend
Total source 2 5 7 10

Modified equity 3 4 8 0

Maximum of dividend 2 4 7 0

Dividend payable 1 4 7 0

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Issued capital
Definition:
That part of the capital which is delivered by the owners,
investors
When they establishes an entity or increases the capital
Deliver the capital without any restrictions
With the aim to get membership and increase it

Can be recognized:
In case of obligation of registration: With the date when the
Court of Registration issues the decree of registration
In other cases: When the capital is delivered

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Minimum of issued capital

At Ltd. Plc.
Minimum:
Minimum: Open 20.000 th HUF
3.000.000 HUF Closed 5.000 th HUF

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 How to increase the issued capital
Issued capital 200
Can be done by:
Issued, but not paid capital - 10
1. Provide cash or other assets Capital reserve 100
to increase
Profit reserve - 80
2. With a decrease of capital Tied up reserve 10
reserve or profit reserve
Revaluation surplus 10
Net profit of the year 10
Equity 240
Modified equity 220
Equity can be used for 20
increase the capital

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Increase the capital at Plc.
It can be increased:
a) issue new shares
b) from the equity-surplus over the issued capital
c) Issue shares to the employees
d) Issue convertible bonds

At open Plc.:
Issue new shares: can be done only with CASH
If the price at issuing > face value: the total of the difference has
to be paid

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Example - Increase the capital at Open Plc.
1. The general meeting of the company decided to increase the capital
with 20.000 th HUF.

2. Face value of new shares: 100 th HUF/share, price at issue 110 th

HUF/share.

3. The 20 % of the amount was transferred at subscription.

4. Until the day of the general meeting when the capital increase was
accepted, the investors transferred, supplemented the amount of the
shares up to 50 %.

5. The capital increase was registered by the court of registration.

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Solution
1/1 Capital paid in at issuing: face value
Dr 384 BANK - Cr 479 STL (because has not been registered)
20 000*0,2=4 000

1/2 Capital paid in at issuing: share premium

(the total amount has to be paid in)
Dr 384 Cr 479. (because has not been registered)
=20 000*10% = 2 000

2/ payment of 30 % (up to the 50 %)

Dr 384 - Cr 479 (because has not been registered)
=20 000*0,3=6 000

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3. Registration of capital increase =20 000
Dr 3. Issued, but not paid capital
Cr 411. Issued capital 20 000

4. Settlement of accounts
Dr 479. Cr 3. Issued, but not paid capital 10 000

4/3 Post the capital premium to capital reserve

Dr 479. - Cr 412. Capital reserve 2 000

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Decrease the issued capital
Can be done based on:
-Own decision of the entity
-Rules of laws (civil code)

Important:
the minimum of the issued capital shall be taken into
consideration

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Possibilities of decrease
Withdraw capital
Decrease it and increase a reserve

Cases of decrease:
1.Forfeit of own shares
2.Post up to the capital reserve: Dr 411- Cr 412
3.Post up to the profit reserve: Dr 411- Cr 413
4.With paying cash: Dr 411-Cr 384
5.With delivering other assets: Dr 411- Cr 1/2

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 Capital reserve

A constant element of the equity

The owners, investors deliver it to the entity and there is no
obligation from the entity side to pay it back
Not registered at the court of registration
It can not be negative!

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Capital reserve - increase
1) if a Plc. Issues shares higher than its nominal (par)
value, the difference between the nominal value and
the issuing price
2) When a company is established, the owners can
decide to have issued capital + capital reserve
3) decrease of subscribed capital against the capital
reserve,
4) the returned portion of tied-up capital reserve when
released,
5) the value of assets transferred to the capital reserve on
the basis of legal provisions, simultaneously upon
realization of the cash or asset.

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Capital reserve - decrease
1) an increase of the subscribed capital from the available
capital reserve;
2) the amount used to off-set a negative accumulated
profit reserve due to a loss;
3) the amount transferred from the capital reserve into the
tied-up reserve,
4) the amount withdrawn from the capital reserve to decrease
the subscribed capital through disinvestment
5) the value assets transferred as against the capital reserve
on the basis of legal provisions, simultaneously upon
realization of the cash or asset.

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 Profit reserve
Increases:
1)Primarily the net profits/losses of the previous years
2)Decrease of issued capital
3)Post up amount from the capital reserve to off-set the losses
4)At the owner of the company who gave the cash to
compensate the losses: the amount of supplementary
payment paid back by the other entity
5)As a result of (self)-controls for the previous years: the effect of
the control increases the profit reserve
6)Post up amount from the tied-up reserve
7)Received cash and other assets based on laws

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 Decreases of profit reserve
1. Losses of previous years
2. Increase of issued capital
3. Use to pay dividend (to supplement the profit after taxation)
4. Supplementary payments at the owner of the entity
5. Withdrawal of equity + related item the decrease of the profit
reserve
6. As a result of (self)-controls for the previous years: the effect of the
control decreases the profit reserve
7. Post up amount to the tied-up reserve
8. Withdraw of own shares: if the book value is > nominal value
9. Given cash and other assets based on laws

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 Example on withdraw of capital

An Ltd. witdraws its capital to the half of the issued capital.

Issued capital 10 000 th HUF
Capital reserve 0 th HUF
Profit reserve 3 000 th HUF
Other reserves 0 th HUF
Dr 411. Issued capital 5 000
Dr 413. Profit reserve 3 000
Cr 479. /384 8 000

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 Tied-up reserve
Most tipical events:

1)To off-set, compensate the losses: Shall be registered when

the cash inflow happened

2)Other possibility: development reserve to decrease the tax base

Can ben tied-up from profit reserve or captal reserve

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From the profit reserve: Dr 41- Cr 414
(Only the most frequent ones)
1)the face value of repurchased own shares and own participations
and the repurchase (purchase) value of redeemable shares,
2) the capitalized value of formation/reorganization
3)the capitalized value of experimental development, the amount of
which is not yet written off,

From Capital reserve

1)Based on legal regulations or own decision
2)When the cash and other assets delivered
3)But these have to be given back!

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Revaluation reserve

Possibility, not compulsory

Revaluation at the asset side shall be equal with the
revaluation in the equity
For fixed assets
Fair value, market value closest to the date of preparation of
the BS
Positive difference: market value > book value
After reverse of impairment of the asset
Shall be confirmed by an auditor

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Where the revaluation can be
applied?
Financial
Intangible
Tangible assets investments
assets

Rights All of them, Long term

Intellectual except shares
assets investments (investments)

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Accounting of Revaluation

Revaluation
Dr 1X7. Assets revaluation
Cr 4171. Revaluation reserve

Derecognition of revaluation:
Dr 4171. Revaluation reserve
Cr 1X7. Assets revaluation

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 Net profit of the year Profit after tax

The amount of the profit after taxation left by the owners at the
entity
Profit before tax Tax expense = Profit after tax

Tax expense:
Dr 891 Tax expense Cr 461 Corporate Tax liability

Profit after tax:

Dr 493 PL closing account Cr 417 Profit after tax

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