As we have discussed earlier, an entity’s capital or equity is something that the owners have effectively invested into the entity in the form of paying in capital and later on leaving profits undistributed – share capital, reserves and retained earnings comprise the most significant part of equity under normal conditions. An entity’s equity is also labelled as ‘net assets’ of a company reflecting the portion of what’s left of the company once it uses up all its assets to settle its liabilities.  Continue reading →

Statement of changes in owner’s equity is a statement that’s prepared usually just once a year for the Annual Report. As it is, it’s important to note that the changes are then reflected from the previous period end to the current period end.  Continue reading →

Why have controls over capital and other equity accounts? It may seem like a reasonable question, but I have to be honest, from experience I’ve encountered more than just one scenario when the management wished they had such controls.  Continue reading →

Payments into equity are made to two types of accounts – share capital and reserves. No payments are to be made to retained earnings. Retained earnings account can only be changed in two circumstances – for paying dividends (that is payment is done from retained earnings) or changed when dealing with restructuring, i.e. merging or dividing entities. That’s however something we’re not focusing on at this point.   Continue reading →

Capital of an entity is divided into two – internal and external capital. An internal capital is owner’s equity and external capital is what third party has “paid into the entity”. Normally loans given and not supplier payables are defined as external capital. The reason for that lies behind the subject matter – supplier payables are operations related whereas loans are taken for further investments either for expanding the business, buying new equipment etc.  Continue reading →

With loans you’ll be taking, often times the transaction costs are a significant part of the loan, i.e. like in our example of lending 100,000 a contract fee of 2,000 would be considered as significant. Now in case the cost is less significant, say 500, this would be charged to expenses right away and you’d account your loan received still as 100,000. However, pretending now that the cost was 2,000, you’d account as money obtained 100,000 less this 2,000 (that is 98,000) (see entry number 1) and this 2,000 would over time be credited onto the loan payable so that eventually you’ll still pay back 100,000 (see entry number 2).  Continue reading →

Equity is not “married” to the company indefinitely; it can be decreased just as it can be increased. Now, to focus on the negative change in equity, decrease can happen in two ways:  Continue reading →