Is additional capital an asset or a liability?
From an economic point of view, additional capital is a certain monetary value formed in the company, which does not entail any obligations of the company to its counterparties.
In this regard, additional capital directly affects the company’s net assets, and therefore its overall welfare, and the value of such a business. For information on how the current value of a company’s net assets is assessed, see the articles:
- “Net assets - calculation formula for the 2019 balance sheet”;
- “The procedure for calculating net assets on the balance sheet - formula 2019-2020.”
As a general rule, an organization is considered to be more stable financially, the greater the value of its own funds relative to borrowed funds. Additional capital refers specifically to the company's own funds. Therefore, in accounting, its value is reflected as part of the company’s equity capital (clause 66 of the Regulations on accounting, approved by order of the Ministry of Finance of the Russian Federation dated July 29, 1998 No. 34n [hereinafter referred to as Regulation No. 34n]).
What is equity and how to calculate it, read the article “Equity on the balance sheet is...”.
As a general rule, an organization's equity accounts are passive accounts. Additional capital is no exception: accounting is kept on account 83. Accordingly, an increase in its value is accompanied by entries to the credit of account 83, and a decrease - by entries to the debit of account 83.
Check whether you are accounting for additional capital correctly with the help of advice from ConsultantPlus. If you do not have access to the K+ system, get a trial online access for free.
In the financial statements, additional capital is also reflected in the liability side of the balance sheet (in section III).
What is a balance sheet and how to fill it out, read the articles:
- “Balance sheet (assets and liabilities, sections, types)”;
- “The procedure for drawing up a balance sheet (example).”
How much is additional capital generated?
Clause 68 of Regulation No. 34n states that the enterprise generates additional capital through:
- carrying out additional valuation of non-current assets in accordance with the law;
- receiving a sum of money exceeding the nominal value of the issued shares (share premium of the joint-stock company);
- receipts to the company of other amounts of a similar nature.
NOTE! Additional capital includes all these funds, however, in the accounting (balance sheet) each of the listed amounts that form the DC must be reflected separately.
Let's consider each of these methods in more detail.
Firstly, an organization’s additional capital can be formed (increased) by revaluing (namely revaluing) the company’s non-current assets (i.e. fixed assets). Revaluation consists in the fact that not only the initial (current) cost of an asset is subject to recalculation, but also the amount of depreciation accrued in the aggregate for previous periods for the asset (clause 15 of PBU 6/01 “Accounting for Assets”, approved by order of the Ministry of Finance of the Russian Federation dated 03/30/2001 No. 26n).
IMPORTANT! The company has the right to revaluate fixed assets no more than once a year. Moreover, if a company decides to revaluate its fixed assets, then it must be borne in mind that in the future the revaluation will have to be carried out regularly (requirement of clause 15 of PBU 6/01).
If, as a result, the recalculated value of the fixed assets exceeds the previous one, formed based on the results of the previous revaluation (if the revaluation is carried out for the first time, the original value is taken into account), then the value of the additional valuation forms additional capital.
If the company, based on the results of the previous revaluation, identified a decrease in the value of fixed assets (markdown) and wrote it off as expenses (this must be done due to the direct requirement of clause 15 of PBU 6/01), then if an increase in the value of fixed assets is identified in the subsequent period, the amount of the revaluation will not be included in additional capital, but will have to be accounted for as other income.
Sources of additional capital
It is important for a manager to take into account the sources of DC. This measure allows you to identify the strengths of the company. Sources of additional capital are:
- Carrying out additional valuation of non-current assets, upon which an increase in their value was discovered.
- Share premium. It is formed through the sale of securities. The transaction value must be greater than the nominal price. In this case, the company receives additional profit.
- An increase in the actual valuation of the contribution to the authorized capital relative to the nominal value.
- Receiving gratuitous contributions.
- The restored amount of VAT arising as a result of the transfer of property by the founder to the authorized capital.
- Budget allocations that were used to increase turnover.
- The difference between the rates that appeared when creating the authorized capital. This is relevant if you have deposits in foreign currency.
- Income for capital contributions that has not been distributed.
Additional capital must have all the features listed above. Otherwise, the receipt will be classified as another form of income.
Additional capital without revaluation in the balance sheet - what is it and how is it formed
The second basis for the formation of the authorized capital is related to the receipt by the joint-stock company of income from the sale of shares in an amount greater than their nominal value.
NOTE! Formally, such a basis is prescribed by the legislator only for JSC. At the same time, regulatory authorities apply a similar rule to LLCs. Therefore, if an LLC sells a participation interest at a price exceeding its nominal value, the company also generates share premium, which forms additional capital (letter of the Ministry of Finance of the Russian Federation dated September 15, 2009 No. 03-03-06/1/582).
The third circumstance leading to the formation of additional capital of the company, provision No. 34n names the receipt by the company of other amounts of a similar nature.
Such amounts include, for example:
- receipts from the founders that do not change the size and nominal value of their share in the authorized capital (Article 27 of the Law “On Joint Stock Companies” dated 02/08/1998 No. 14-FZ, Article 32.2 of the Law dated 12/26/1995 No. 208-FZ, section “Reflection joint-stock company information on contributions to its property" in the appendix to the letter of the Ministry of Finance of Russia dated December 28, 2016 No. 07-04-09/78875);
- property received by a unitary enterprise from the owner for economic management in excess of the size of the authorized capital (see section “Disclosure by a federal state unitary enterprise of information about property received for economic management in excess of the size of the authorized capital” in the appendix to the letter of the Ministry of Finance of Russia dated January 22, 2016 No. 07- 04-09/2355).
If the founder is a foreigner and he decides to contribute funds to the business in the form of foreign currency, then a basis for the formation of additional capital may also arise here. After all, the moment of reflection in the accounting of the operation of depositing funds by the founder and the moment of their actual receipt at the company’s cash desk may fall on different dates (due to the accrual principle). As a consequence, if the ruble value of the contributed funds on the date of their actual receipt is greater than the ruble value at the time of formation of the founder’s debt to the company in accounting, then a positive exchange rate difference is formed. It must be included in the company’s additional capital (clause 14 of PBU 3/2006 “Accounting for assets and liabilities in foreign currency”, approved by order of the Ministry of Finance of Russia dated November 27, 2006 No. 154n).
If an organization operates outside the Russian Federation, then assets and liabilities in foreign currency arising in this activity must be recalculated into rubles when preparing financial statements. The differences arising as a result of the recalculation of these assets and liabilities are credited to additional capital (paragraph 2 of clause 19 of PBU 3/2006).
Additional capital also includes the amount of VAT recovered by the founder when transferring property as a contribution to the authorized capital and transferred to the established organization (subclause 1, clause 3, article 170 of the Tax Code of the Russian Federation, letter of the Ministry of Finance of Russia dated October 30, 2006 No. 07-05-06 /262, dated December 19, 2006 No. 07-05-06/302). In addition, some possibilities for the formation of DCs are provided for by the Chart of Accounts, approved by Order of the Ministry of Finance of the Russian Federation dated October 31, 2000 No. 94n.
In particular, the document states that with account 83, in addition to those indicated above, accounts 84 “Retained earnings” and 86 “Targeted financing” can correspond. Consequently, additional capital can be increased using some of the profit remaining after payment of dividends, as well as with the help of targeted income from investors.
Thus, there are very specific ways to form a DC in a company, which every manager should have a clear understanding of in order to strengthen the financial position of the company.
At the same time, since it is generally accepted that this type of capital is a kind of safety net for the organization, the question arises: in what situations does its presence benefit the company?
Account 83: features of reflecting additional capital
Additional capital is called a safety cushion primarily because it, as a rule, is not spent. This is indicated in the instructions for using the Chart of Accounts (account 83), where, in particular, it is explained that the amounts that were credited to account 83 are, as a general rule, not written off in the future. At the same time, it is indicated that entries in the debit of account 83 can be made, but only in certain situations:
- when repaying the identified writedown of non-current assets;
- in order to increase the authorized capital of the company;
- when distributing these amounts among the owners of the company.
The identified additional valuation of fixed assets increases additional capital. The opposite situation arises if fixed assets that were overvalued in previous periods show a decrease in their value based on the results of the current revaluation. Such a reduction (markdown) will reduce the company’s capital capital (clause 15 of PBU 6/01).
IMPORTANT! A decrease in additional capital will occur only if the amount of the identified depreciation does not exceed the amount of the total revaluation of fixed assets for all previous periods. If there is an excess, it will be attributed to the financial result and included in other company expenses.
In addition, paragraph 15 of PBU 6/01 states that if any fixed asset is disposed of in an organization, then additional capital must be reduced by the previously identified amount of its revaluation and this amount must be transferred from the capital assets to retained earnings (para. 7 clause 15 PBU 6/01).
NOTE! In order to be able to identify the amount of additional valuation for a specific fixed asset, it is important to keep records for each fixed asset in separate subaccounts in the context of account 83.
The second direction in which an organization can use additional capital is to increase its authorized capital. This method is equally applicable to both JSC and LLC. After all, both the Law “On JSC” dated December 26, 1995 No. 208-FZ, and the Law “On LLC” dated February 8, 1998 No. 14-FZ allow increasing the authorized capital at the expense of the company’s own funds.
IMPORTANT! However, there is one limitation here: you cannot increase the authorized capital using the company’s own funds by an amount greater than the value of its net assets minus the current amount of authorized and reserve capital (clause 2, article 18 of Law No. 14-FZ, clause 5, art. 28 of Law No. 208-FZ).
The third possible use of a company's DC is its distribution among owners.
Therefore, the company’s management, if desired, has the right to decide to pay certain funds from the additional capital to the participants (shareholders) of the company.
In addition, there is a situation when a company is obliged to distribute DCs among its owners. This is what you should do when liquidating a company. In order to identify the total amount of funds to be distributed among the owners upon liquidation, it is necessary to write off the balances of all funds and reserves of the company, which include additional capital, to account 75.
The procedure for accounting for additional capital can be found in the articles:
- “Keeping records of additional capital on account 83 (postings)”;
- “The procedure for accounting for an organization’s own capital (nuances).”
Accounting
To reflect in accounting transactions related to the use of additional capital, use account 83 “Additional capital”. If you have shortcomings in your knowledge of accounting, read the article debit and credit for dummies. Using simple examples, we examined the principles of debit, credit and their balances in simple words.
When paying the founders (participants, shareholders) funds in excess of the amount of reduction in the authorized capital of the organization, make the following entries in the accounting records:
Debit 83 Credit 75-1
– additional capital funds are distributed among the founders (participants, shareholders) of the organization;
Debit 75-1 Credit 51 (52, 50)
– funds of the organization’s additional capital are transferred to the founders (participants, shareholders).
For more information on accounting for transactions related to the use of additional capital for various purposes, see:
- How to reflect the revaluation of fixed assets in accounting;
- How to reflect in accounting an increase in the authorized capital of an LLC at the expense of its own property;
- How to reflect in accounting an increase in the authorized capital of a joint-stock company due to additional placement of shares;
- How to reflect in accounting an increase in the authorized capital of a joint-stock company due to the conversion of shares.
Situation: can additional capital be used to cover losses from previous years?
The answer to this question depends on how the additional capital was formed.
The legislation does not contain a direct indication of the possibility of using additional capital to pay off losses, as well as a direct prohibition on this.
As a rule, the additional capital of an organization is formed from additional property received by the company. An exception is cases of revaluation of fixed assets and intangible assets. The fact is that the revaluation amounts do not reflect the value of the actual property received, since they were formed “virtually” according to accounting rules.
The owner of property created from the contributions of the founders, as well as produced and acquired by the company in the course of its activities, is the company itself (Clause 1, Article 66 of the Civil Code of the Russian Federation). That is, the organization can dispose of it at its own discretion.
Thus, the organization has the right, by decision of the founders (participants), to allocate funds from additional capital to repay received losses. The exception is the amount of additional capital that was formed as a result of the additional valuation of property. This amount can only be used to depreciate the fixed asset or intangible asset in the future. It cannot be used to cover losses (paragraph 6, paragraph 15 of PBU 6/01, paragraph 2, paragraph 21 of PBU 14/2007, letter of the Ministry of Finance of Russia dated July 21, 2000 No. 04-02-05/2).
Confirms the possibility of using additional capital to cover losses and that the list of options for using additional capital given in the Instructions for the chart of accounts is open. At the same time, the openness of this list is indicated by the fact that the last paragraph of the list ends with the words “etc.”
In accounting, reflect the use of additional capital funds to cover losses of previous years by posting:
Debit 83 Credit 84
– additional capital funds are aimed at covering losses of previous years.
An example of using additional capital to cover losses of previous years. Additional capital was formed from the share premium of the organization
As of December 31, 2014, Alfa CJSC recorded additional capital in the amount of RUB 300,000. It was formed through the placement of company shares at a price above their par value (i.e., at the expense of share premium).
Based on the results of activities for 2014, the organization received a loss in the amount of 360,000 rubles. In 2020, it was decided to use the full amount of additional capital to pay off the loss.
In 2020, Alpha’s accountant made the following entry in accounting:
Debit 83 Credit 84 – 300,000 rub. – additional capital generated from share premium was used to cover the 2014 loss.
The amount of the organization's uncovered loss for 2014 amounted to 60,000 rubles. (360,000 rub. – 300,000 rub.).
Use of additional capital: controversial issues
In addition to the generally established cases of using additional capital, which in practice do not cause much controversy, there are also several controversial situations.
In practice, many companies experience losses at least once over several years. At the same time, among specialists of those companies in which the DC has been formed, differences of opinion very often arise on the following question: is it possible to cover the losses incurred in previous years at the expense of the DC?
On the one hand, it can be assumed that since the current legislation does not directly provide for such an area of spending additional capital, it cannot be used to cover losses.
On the other hand, the current civil, accounting and tax legislation does not contain a direct prohibition to do this. The regulatory authorities only noted that it was impossible to cover losses at the expense of that part of the capital account that corresponds to the amount of additional valuation of fixed assets (letter of the Ministry of Finance of the Russian Federation dated July 21, 2000 No. 04-02-05/2).
Disputes arise in practice and around another situation. As mentioned above, with the help of DCs you can partially increase the authorized capital. However, the additional capital itself consists of funds of different economic nature. The question arises: can any parts of the cultural center increase the charter? After all, the DC may include, for example, amounts of positive revaluation of fixed assets, which do not actually form a real cash flow in the company.
On the one hand, PBU 6/01 allows the amount of the identified revaluation to be used either to cover a subsequently identified writedown of fixed assets, or to increase the firm’s retained earnings (if the fixed assets are disposed of). Whether it is possible to contribute additional capital in this part to increase the authorized capital is not indicated in the PBU.
At the same time, the legislator does not limit the right of the organization to use additional capital to increase the authorized capital, depending on the exact nature of the individual parts of the DC. In addition, the regulatory authorities also do not provide any exceptions to the rule allowing an increase in the company’s authorized capital at the expense of additional capital (letter of the Federal Tax Service of Russia for Moscow dated April 1, 2005 No. 20-12/21866).
Therefore, it seems that the organization has the right to independently decide which parts of the DC should be aimed at increasing the charter.
Additional capital in reporting
Information about the DC, according to the chart of accounts, is indicated on account 83 of the passive type “Additional capital”. The plan does not indicate how subaccounts are opened for the account in question. Some transactions, based on accounting standards, must be indicated separately:
- revaluation of non-current assets;
- income generated as a result of the issue.
This list is not exhaustive.
An accountant, depending on the needs of the enterprise, can open the following sub-accounts:
- “Increase in the value of objects during revaluation”;
- "Income from issue."
IMPORTANT! Accounting for account 83 also displays the sources of DC creation.
Results
In some cases, the company’s additional capital serves as good insurance, a tool for financial support and increasing the stability of the company. Therefore, it is important to remember that a DC can be formed through the revaluation of fixed assets, the sale of a share in the company at a price higher than the nominal price, as well as as a result of the receipt of other amounts that are similar in their economic essence. At the same time, additional capital cannot be used for any purpose. At the expense of the DC, the legislator allows to repay the identified depreciation of fixed assets, increase the authorized capital of the company, and distribute the DC between the owners. Other cases of using such funds are also possible, but they are not transparent and clearly legal. In accounting, additional capital is a liability of the organization, accounted for in account 83. At the same time, in the context of account 83, the company should keep analytical records of the amounts of individual parts of the capital account, formed on independent grounds.
Sources:
- Tax Code of the Russian Federation
- Law “On JSC” dated December 26, 1995 No. 208-FZ
- Law “On LLC” dated 02/08/1998 No. 14-FZ
- accounting regulations, approved. by order of the Ministry of Finance of the Russian Federation dated July 29, 1998 No. 34n
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