FINANCIAL ACCOUNTING

p. 182

CHAPTER 12: SHAREHOLDERS’ EQUITY

In this chapter, we will discuss the accounting treatment and the different
components of equity. Equity includes the contribution of the owners in the
company, as well as profits (or losses) kept within the firm.

12.1 Definition

International Financial Reporting Standards (IFRS) define equity as “the residual

interest [of the investors] in the assets of the enterprise after deducting all its
liabilities”. This definition follows from the balance sheet equation (cf. Chapter 2),
which states:

ASSETS = LIABILITIES + EQUITY

or
EQUITY = ASSETS - LIABILITIES

The second equation clearly coincides with the aforementioned definition of

equity.

12.2 Belgian Chart of Accounts

The following equity accounts are discerned in the Belgian chart of accounts:

10 Capital
100 Issued capital
101 Uncalled capital (-)
11 Contributions outside capital
110 Available contributions outside capital
1100 Share premium
1109 Other
111 Unavailable contributions outside capital
1110 Share premium
1119 Other
12 Revaluation surplus
120 Revaluation surplus on intangible fixed assets
121 Revaluation surplus on tangible fixed assets
122 Revaluation surplus on financial fixed assets
123 Revaluation surplus on inventories
124 Adjustment to amounts written off investments
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13 Reserves
130 Legal reserve
131 Reserves not available for distribution
1311 Reserve in respect of the articles of association
1312 Reserve in respect of own shares held
1313 Financial support
1319 Other
132 Untaxed reserves
133 Reserves available for distribution
14 Profit or loss carried forward
140 Profit carried forward
141 Loss carried forward (-)
15 Investment grants

12.3 Belgian Balance Sheet

Two different templates of the financial statements exist for Belgian firms. One
template relates to firms having capital, being the so-called public limited
companies (naamloze vennootschap (NV)). The other template relates to firms
having no capital (but contributions outside capital instead), being the so-called
private companies (besloten vennootschap (BV)).

For public limited companies, we find the following information related to equity in
the Belgian format of the balance sheet:

EQUITY 10/15
I. Contribution 10/11
A. Capital 10
1. Issued capital 100
2. Uncalled capital (-) 101
B. Outside capital 11
1. Share premium 1100/10
2. Other 1109/19
II. Revaluation surpluses 12
III. Reserves 13
A. Reserves not available 130/1
1. Legal reserve 130
2. In respect of the articles of association 1311
3. In respect of own shares held 1312
4. Financial support 1313
5. Other 1319
B. Untaxed reserves 132
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C. Reserves available 133

IV. Profit (loss) carried forward (+)/(-) 14
V. Investment grants 15

For private companies, we find the following information related to equity in the
Belgian format of the balance sheet:

EQUITY 10/15
I. Contribution 10/11
A. Available 110
B. Unavailable 111
II. Revaluation surpluses 12
III. Reserves 13
A. Reserves not available 130/1
1. In respect of the articles of association 1311
2. In respect of own shares held 1312
3. Financial support 1313
4. Other 1319
B. Untaxed reserves 132
C. Reserves available 133
IV. Profit (loss) carried forward (+)/(-) 14
V. Investment grants 15

In the following sections, we will discuss the aforementioned components of equity

in more detail. In the parts that follow, we will focus on public limited companies
(format with capital), but we will highlight the most important differences
compared to private companies (format without capital).

12.4 Share Capital – Public Limited Companies (Contribution – Private

Companies)

Share capital reflects the contribution of the shareholders (or owners) in the firm.
Share capital is represented by shares, which are distributed among the
shareholders in proportion to their contribution in the company. Shares give
shareholders several rights, including:
 influencing management decision making (i.e., by means of votes on the
annual meeting of shareholders);
 receiving dividends and/or eventual liquidation surpluses; and
 first pass at acquiring additional shares (proportionally to the current
holding) in case of a new issue of shares.
The par value of a share is the amount of share capital divided by the number of
shares. If a share mentions its value, this is called the nominal value of the share.
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Total share capital of the firm is recorded on account ‘100 Issued capital’. The
latter is also referred to as subscribed capital. It is important to note that it may be
that shareholders are not required to settle their entire contribution at the start-up
of the company. This is due to the fact that a newly created business often does not
need to have all the capital available right at the beginning and/or would not be
able to provide shareholders a return that would be competitive. The amount of
capital that does not have to be settled at the start-up has to be recorded on
account ‘101 Uncalled capital (-)’. The account name mentions a minus (between
brackets) due to the fact that it is an equity account with a debit balance. That is,
this account reflects a receivable on the firm’s shareholders and should therefore
be debited. The amount of capital that is actually settled by the shareholders is
therefore the difference between the balances of accounts ‘100 Issued capital’ and
‘101 Uncalled capital (-)’. The latter is also referred to as paid-in or contributed
capital.

01/07/19X5
Incorporation of company ABC with a subscribed capital of 100.000,00
EUR. Initially, shareholders are required to pay up their shares for 80%
(C/A extract no. X5/001). The remainder of subscribed capital (i.e., 20%)
is therefore uncalled.

The current account extract gives rise to the following journal entry:

No. Debit Credit Debit Credit

1 01/07/19X5
5500 Credit institutions - Current account 80.000,00
101 Uncalled capital (-) 20.000,00
100 @ Issued capital 100.000,00
C/A extract no. X5/001

In the T-accounts, we get:

5500 Credit institutions - Current

D C D 100 Issued capital C
account
(1) 80.000,00 100.000,00 (1)

D 101 Uncalled capital (-) C

(1) 20.000,00
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As mentioned earlier, paid-in capital can be determined as the difference between

the balances of account ‘100 Issued capital’ and ‘101 Uncalled capital (-)’ and
therefore equals 80.000,00 EUR in this particular example.

When shareholders are required to pay up their uncalled capital, account ‘410
Called capital or contribution’ (a short-term receivable account) is used.

01/07/19X7
Due to a need for cash, the annual meeting of shareholders of ABC decides
to call up the entire amount of uncalled capital.

The decision of the annual meeting of shareholders gives rise to the following
journal entry:

No. Debit Credit Debit Credit

1 01/07/19X7
410 Called capital or contribution 20,000.00
101 @ Uncalled capital (-) 20,000.00
Decision annual meeting shareholders

In the T-accounts, we get:

D 101 Uncalled capital (-) C D 410 Called capital or contribution C

(OB) 20,000.00 20,000.00 (1) (1) 20,000.00

01/08/19X7
All shareholders paid up the called capital (C/A extract no. X7/123).

The current account extract gives rise to the following journal entry:

No. Debit Credit Debit Credit

2 01/08/19X7
5500 Credit institutions - Current account 20,000.00
410 @ Called capital or contribution 20,000.00
C/A extract no. X7/123

In the T-accounts, we get:

5500 Credit institutions - Current

D 410 Called capital or contribution C D C
account
(1) 20,000.00 20,000.00 (2) (2) 20,000.00
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At this point, it is important to note that not all shares need to be issued against
cash. It might, for example, be that one brings in a building (or another type of
tangible fixed asset) in exchange for shares of the company. The latter is a so-
called contribution in kind. The accounting treatment of a contribution in kind is
analogous to the accounting treatment of a contribution in cash, except for the fact
that a contribution in kind is always for the full 100 percent. Even if, for example,
80 percent of capital is called (as was the case in the aforementioned example) the
contribution in kind has to be made in full (i.e., the full 100 percent). The 80
percent called capital only relates to the part of capital that is contributed in cash.
The following example provides an illustration of how a contribution in kind is
recorded:

01/07/19X5
Incorporation of company ABC with a subscribed capital of 100.000,00
EUR. There are two founders: one founder will bring in 50.000,00 EUR;
the other founder will bring in a van worth 50.000,00 EUR. Initially,
shareholders are required to pay up their shares for 80% (C/A extract no.
X5/001). The remainder of subscribed capital (i.e., 20%) is therefore
uncalled.

The current account extract gives rise to the following journal entry:

No. Debit Credit Debit Credit

1 01/07/19X5
5500 Credit institutions - Current account 40.000,00
101 Uncalled capital (-) 10.000,00
240 Vehicles - Cost of acquisition 50.000,00
100 @ Issued capital 100.000,00
C/A extract no. X5/001

In the T-accounts, we get:

5500 Credit institutions - Current

D C D 240 Vehicles - Cost of acquisition C
account
(1) 40.000,00 (1) 50.000,00

D 101 Uncalled capital (-) C D 100 Issued capital C

(1) 10.000,00 100.000,00 (1)

It might be interesting to add that different types of shares may exist within a firm.
Next to ordinary shares, the firm may also have shares with amended voting rights.
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Whereas ordinary shares each have one vote at the general assembly of
shareholders, this will not be the case for such shares (e.g., two votes for one
share). Preferred shares are another type of shares. These shares have a specific
advantage compared to ordinary shares (e.g., higher dividend, dividend in years of
losses, etc.).

In Belgium, legislation prescribes a minimum with respect to the amount of

subscribed and paid up capital for public limited companies. That is, a public limited
company requires a subscribed capital of at least 61.500,00 EUR for which at least
one fourth (with a minimum of 61.500,00 EUR) is paid up. Because of a change in
legislation (May 1, 2019), Belgian private companies no longer require a ‘capital’
and that is why the 11-accounts related to ‘Contributions outside capital’ were
introduced in the chart of accounts. For newly incorporated private companies,
the 110-accounts ‘Available contributions outside capital’ are applicable. The
‘available’ refers to the fact that these contributions can be repaid to the owner(s)
of the firm if no longer needed (subject to a liquidity and solvency test). Before the
change in legislation, private companies were also subject to a minimum capital.
For private companies incorporated under the old regime, capital is converted (by
law) into ‘Unavailable contributions outside capital’ (i.e., 111-accounts). The
unavailable refers to the fact that these contributions cannot be just repaid to the
owner(s) of the firm if no longer needed. The formal requirements related to a
capital decrease are applicable in this case (and these are quite burdensome).
Because of the difference between both types of companies (resulting in capital vs.
contributions), two distinct templates of the financial statements exist (cf. Section
12.3 where two separate templates of equity are presented depending on whether
dealing with a public limited company or a private company).

Whereas a firm’s capital is usually fairly stable over time, capital increases and
decreases may occur. A capital increase may occur when the firm issues new
shares in order to obtain additional cash. Alternatively, a firm may decide to
incorporate reserves (cf. infra) into capital, which quite logically results in an
increase of capital. A capital decrease may occur if the firm decides to pay back
some of its shares. The latter may be the case if the firm is no longer in need of its
current level of capital due to a decrease in firm size (or a decrease in its activities).
Alternatively, a capital decrease may be the result of the incorporation of
(retained) losses into capital.

12.5 Share Premium

A share premium relates to a capital increase (and thus public limited companies).
If a company issues new shares and the issue price of a share is set above its par
value, the difference between the issue price and the par value is called share
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premium. Share premiums have to be recorded on account ‘1100(10) Share

premium’. Issuing shares with a price that exceeds their par value is induced by
the need to ensure that existing shareholders do not bear a loss on the value of
their shares when new shares are issued. In what follows, we rely on a basic
example to illustrate this.

30/06/20X5
Due to a need for cash, ABC decides to increase its capital by issuing 1.000
new shares. Before the capital increase, equity of ABC looks as follows:

I. Capital (2.000 shares) 200.000,00 EUR

III. Reserves 50.000,00 EUR
IV. Profit carried forward 20.000,00 EUR

The total amount of share capital is represented by 2.000 shares. Accordingly, we

get:

Par value of a share = issued capital

number of shares
= 200.000,00 EUR
2.000 shares
= 100,00 EUR

It is important to acknowledge that the total amount of equity belongs to the firm’s
shareholders. That is, as we will see later on in this chapter, the other equity items
are profits that are kept within the firm. Given the fact that shareholders are
entitled to the profits of the firm, they are also entitled to profits that are kept within
the firm. In this example, the total amount of equity exceeds the total amount of
capital and the real value of a share will therefore exceed its par value. Based on the
aforementioned considerations, another way of calculating the value of a share
would be dividing the total amount of equity by the number of shares. The latter is
called the ‘intrinsic’ value of a share. Accordingly, we get:

Intrinsic value of a share = total amount of equity

number of shares
= 270.000,00 EUR
2.000 shares
= 135,00 EUR

Let’s now assume that ABC issues 1.000 new shares at par value. After the capital
increase, equity would look as follows:
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I. Capital (3.000 shares) 300.000,00 EUR

III. Reserves 50.000,00 EUR
IV. Profit carried foward 20.000,00 EUR

Accordingly, we get:

Par value of a share = 300.000,00 EUR

3.000 shares
= 100,00 EUR

and

Intrinsic value of a share = 370.000,00 EUR

3.000 shares
= 123,33 EUR

While the par value of the shares remains unaltered, we note a drop in the intrinsic
value of the shares after the capital increase. It should be clear that existing
shareholders would make a loss of 11,67 EUR on their shares (i.e., intrinsic value
before the capital increase - intrinsic value after the capital increase) resulting from
the capital increase. New shareholders, on the other hand, would make an
immediate profit of 23,33 EUR on their shares. That is, if shares are issued at par
value, they would have to pay 100,00 EUR for shares that are worth 123,33 EUR
immediately after the increase in capital.

To avoid the aforementioned loss for existing shareholders, the issue price will be set
equal to the intrinsic value of the shares (135,00 EUR in our example). As mentioned
before, the difference between the par value (100,00 EUR) and the issue price
(135,00 EUR) is then the share premium (35,00 EUR), which has to be recorded on
account ‘1100(10) Share premium’. After the increase in capital, equity would look
as follows:

I. Capital (300 shares) 300.000,00 EUR

I. Contr. outside capital - Share premium
35.000,00 EUR
III. Reserves 50.000,00 EUR
IV. Profit carried forward 20.000,00 EUR

Accordingly, we get:

Par value of a share = 300.000,00 EUR

3.000 shares
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= 100,00 EUR

and

Intrinsic value of a share = 405.000,00 EUR

3.000 shares
= 135,00 EUR

From this, it should be clear that the loss for the existing shareholders is offset by
requiring new shareholders to pay a share premium.

The capital increase would then give rise to the following journal entry (i.e., if we
assume that all shares are paid in full):

No. Debit Credit Debit Credit

1 30/06/20X5
5500 Credit institutions - Current account 135,000.00
100 @ Issued capital 100,000.00
1110 Unavailable contr. - Share premium 35,000.00
C/A extract no. …

In the T-accounts, we get:

5500 Credit institutions - Current

D C D 100 Issued capital C
account
(1) 135,000.00 200,000.00 (OB)
100,000.00 (1)

D 1110 Unav. contr. - Share premium C

35,000.00 (1)

It is important to note that, even if shares are not required to be paid in full, a share
premium always has to be fully paid. For example, if the new shareholders are
required to pay up the aforementioned shares for only 80%, we would get the
following journal entry:

No. Debit Credit Debit Credit

1 30/06/20X5
5500 Credit institutions - Current account 115,000.00
101 Uncalled capital (-) 20,000.00
100 @ Issued capital 100,000.00
1110 Unavailable contr. - Share premium 35,000.00
C/A extract no. …
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In the T-accounts, we would then get:

5500 Credit institutions - Current

D C D 100 Issued capital C
account
(1) 115,000.00 200,000.00 (OB)
100,000.00 (1)

D 101 Uncalled capital (-) C D 1110 Unav. contr. - Share premium C

(1) 20,000.00 35,000.00 (1)

12.6 Profit (or Loss) Appropriation

Profit appropriation relates to the allocation of profits (losses). Because profits

(losses) of the firm accrue to its shareholders, it is only logical that the general
assembly of shareholders decides on profit appropriation.

In case of a profit, the general assembly of shareholders has two options:

1. keep profits within the firm; or
2. distribute profits to shareholders.
Under the first option, profits will be taken into equity as either a reserve (recorded
on a sub-account of account ‘13 Reserves’) or as a retained profit (recorded on
account ‘140 Profit carried forward’). Whereas reserves are a specific allocation of
profits, this is not true for retained profits. Retained profits are in fact profits that
are carried over to the next accounting year and will therefore be included in next
year’s profit appropriation. Profits that are allocated to a reserve, on the other
hand, will stay there until the firm decides otherwise. It should therefore be clear
that reserves will not be included in next year’s profit appropriation. All of this
will be illustrated in an example that follows. From the standardized format of the
Belgian balance sheet for public limited companies, it can be seen that different
types of reserves exist:

III. Reserves 13
A. Reserves not available for distribution 130/1
1. Legal reserve 130
2. In respect of the articles of association 1311
3. In respect of own shares held 1312
4. Financial support 1313
5. Other 1319
B. Untaxed reserves 132
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C. Reserves available for distribution 133

The first type of reserve is the so-called ‘legal reserve’, which relates to the fact
that Belgian public limited companies are required by law to add each year 5% of
their profit of the current accounting period (after deducting retained losses, if
applicable) to the reserves (i.e., the legal reserve in particular) up to the moment
that the amount of this legal reserve equals 10% of issued capital. This
requirement aims at a better protection of the firm’s creditors in case of
liquidation. Because private companies have no capital (but contributions
instead), the requirement is not applicable to them (and the legal reserve is thus
not mentioned in their template of the financial statements, cf. Section 12.3). It
might be interesting to add that the requirement of a legal reserve is not that
common internationally. Nevertheless, some other countries (e.g. France) also
require the creation of a legal reserve. Note that the legal reserve belongs to the
so-called ‘Reserves not available for distribution’, which are reserves over which
the general assembly of shareholders cannot decide by ordinary majority. Other
examples of reserves unavailable for distribution include reserves that are created
because stipulated in the articles of association of the firm (e.g. stipulation that
each year a certain percentage of the profit needs to be added to the reserves).
Untaxed reserves, on the other hand, relate to profits that are temporarily
exempted from taxes. Finally, reserves available for distribution are reserves over
which the general assembly of shareholders can decide by ordinary majority.

Next to keeping profits within the company, the general assembly also has the
option to distribute (part of) the profit to the shareholders by means of a so-called
‘dividend’. Account ‘471 Dividends for the current accounting year’ is used to
express the (short-term) liability that results from this decision (i.e., a liability
towards the shareholders). Because private companies have no capital, nor a legal
reserve, distribution of profits is only possible after passing a liquidity and
solvency test (i.e. aimed at protecting the firm’s creditors). Specifically, the firm
should be able to meet all its short-term liabilities and net assets (i.e. total assets
minus liabilities) may not become a negative figure.

Before we proceed, it is important to note that account classes 69 and 79 (cf. the
chart of accounts) are used for recording the appropriation of profits and losses in
the income statement. After the appropriation of the profit or loss, the income
statement should fall to zero. Accordingly, 69-accounts are used to deal with profit
appropriation (i.e., in case of a profit, revenues are larger than the expenses and by
debiting one or more 69-accounts you increase your expenses in order to make the
income statement fall to zero) and 79-accounts are used to deal with the
appropriation of a loss (i.e., in case of a loss, revenues are smaller than the
 FINANCIAL ACCOUNTING
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expenses and by crediting one or more 79-accounts you increase your revenues in
order to make the income statement fall to zero).

We are now going to have a look at an example in which the appropriation of a

profit is dealt with:

31/12/20X5
During 20X5 (ABC’s first year of operation), ABC made a profit of
100.000,00 EUR. The profit will be appropriated as follows:

5%  legal reserve
10%  reserves available for distribution
35%  carry over to the next accounting period
50%  dividends

Profit appropriation gives rise to the following journal entry:

No. Debit Credit Debit Credit

1 31/12/20X5
6920 Increase in legal reserve 5.000,00
6921 Increase in other reserves 10.000,00
693 Profit to be carried forward 35.000,00
694 Dividends 50.000,00
130 @ Legal reserve 5.000,00
133 Reserves available for distribution 10.000,00
140 Profit carried forward 35.000,00
471 Dividends for the current accounting year 50.000,00
Profit appropriation 20X5
 FINANCIAL ACCOUNTING
p. 195

In the T-accounts, we get:

D 6920 Increase in legal reserve C D 130 Legal reserve C

(1) 5.000,00 5.000,00 (1)

D 6921 Increase in other reserves C D 133 Reserves available for distribution C

(1) 10.000,00 10.000,00 (1)

D 693 Profit to be carried forward C D 140 Profit carried forward C

(1) 35.000,00 35.000,00 (1)

471 Dividends for the current

D 694 Dividends C D C
accounting year
(1) 50.000,00 50.000,00 (1)

31/12/20X6
During 20X6 (ABC’s second year of operation), ABC made a profit of
80.000,00 EUR. The profit will be appropriated as follows:

5%  legal reserve
Rest  carry over to the next accounting period

As mentioned earlier, retained profits of the previous accounting period will be

included in current year’s profit appropriation. Accordingly, we first book off
retained profits (i.e., we close the account) and take them into current year’s income:

No. Debit Credit Debit Credit

1 31/12/20X6
140 Profit carried forward 35.000,00
790 @ Retained profits of the previous acc. year 35.000,00
Retained profit 20X5
 FINANCIAL ACCOUNTING
p. 196

In the T-accounts, we get:

790 Retained profits of the previous

D 140 Profit carried forward C D C
accounting year
(1) 35.000,00 35.000,00 (OB) 35.000,00 (1)

The profit to be appropriated at the end of 20X6 therefore equals 115.000,00 EUR
(i.e., 80.000,00 EUR (profit 20X6) + 35.000,00 EUR (retained profit 20X5)).
Importantly, the requirement regarding the legal reserve only relates to current
year’s profit. The latter is induced by the fact that the requirement regarding the
legal reserve is already met for retained profits (i.e., in a previous accounting period).
The increase in the legal reserve is therefore calculated as follows: 80.000,00 EUR *
5%. This gives rise to the following journal entry:

No. Debit Credit Debit Credit

2 31/12/20X6
6920 Increase in legal reserve 4.000,00
693 Profit to be carried forward 111.000,00
130 @ Legal reserve 4.000,00
140 Profit carried forward 111.000,00
Profit appropriation 20X6

In the T-accounts, we get:

D 6920 Increase in legal reserve C D 130 Legal reserve C

(2) 4.000,00 5.000,00 (OB)
4.000,00 (2)

D 693 Profit to be carried forward C D 140 Profit carried forward C

(2) 111.000,00 (1) 35.000,00 35.000,00 (OB)
111.000,00 (2)

In the aforementioned discussion, we have solely considered the appropriation of

profits. In what follows, we will briefly discuss the appropriation of losses. We
will consider two alternatives regarding the appropriation of losses: (1) carry over
the loss to the next accounting period; and/or (2) shareholders might decide to
bear (part of) the loss. If the loss is carried over to the next period, account ‘141
Loss carried forward (-)’ will be debited. That is, account 14 is an equity account.
In case of a retained loss, the account shows a negative balance and therefore has
to be debited. If the firm’s shareholders decide to bear the loss, account ‘416 Other
amounts receivable’ will be debited (i.e., because then the firm has a receivable on
 FINANCIAL ACCOUNTING
p. 197

its shareholders up to the moment that the shareholders actually paid for the loss).
In what follows, we are going to have a look at an example, which illustrates the
appropriation of a loss.

31/12/20X5
During 20X5 (ABC’s first year of operation), ABC made a loss of
100.000,00 EUR. The entire loss will be carried over to the next
accounting period.

This decision gives rise to the following journal entry:

No. Debit Credit Debit Credit

1 31/12/20X5
141 Loss carried forward (-) 100.000,00
793 @ Losses to be carried forward 100.000,00
Loss appropriation 20X5

In the T-accounts, we get:

D 141 Loss carried forward (-) C D 793 Losses to be carried forward C

(1) 100.000,00 100.000,00 (1)

31/12/20X6
During 20X6 (ABC’s second year of operation), ABC made a loss of
50.000,00 EUR. Due to the fact that shareholders wish to turn over a new
leaf, they decide to bear all losses.

Just as for retained profits, retained losses of the previous accounting period will be
included in current year’s profit (or loss) appropriation. Accordingly, we first book
off retained losses (i.e., we close the account) and take them into current year’s
income:

No. Debit Credit Debit Credit

1 31/12/20X6
690 Retained losses of the pervious acc. year 100.000,00
141 @ Loss carried forward (-) 100.000,00
Retained loss 20X5
 FINANCIAL ACCOUNTING
p. 198

In the T-accounts, we get:

690 Retained losses of the previous

D 141 Loss carried forward (-) C D C
accounting year
(OB) 100.000,00
100.000,00 (1) (1) 100.000,00

Accordingly, the entire loss to be appropriated in the current accounting period

equals 150.000,00 EUR (i.e., 50.000,00 EUR (loss 20X6) + 100.000,00 EUR (retained
loss 20X5)). Thus, we get the following journal entry:

No. Debit Credit Debit Credit

2 31/12/20X6
416 Other amounts receivable 150.000,00
794 @ Contribution of shareholders for the loss 150.000,00
Loss appropriation 20X6

In the T-accounts, we get:

794 Contribution of shareholders for the

D 416 0ther amounts receivable C D C
loss
(2) 150.000,00 150.000,00 (2)

12.7 Other Components of Equity

Having a look at the balance sheet, you find two other components of equity that
have not yet been discussed in the current chapter:

II. Revaluation surpluses 12

V. Investment grants 15

We already discussed the content of revaluation surpluses when we studied

‘Tangible Fixed Assets’ (cf. Chapter 9). Accordingly, we are not going to discuss it
again. The content and the accounting treatment of investment grants is beyond
the scope of this textbook.
 FINANCIAL ACCOUNTING
p. 199

12.8 Summary and Learning Objectives

In this chapter, we dealt with the accounting treatment and the components of
equity. Because equity also includes profits (losses) kept within the firm, we also
dealt with profit (loss) appropriation at the end of the accounting period.

By now, using the Belgian chart of accounts, you should be able to account for:
- the formation of capital (or a contribution);
- a capital increase (including a share premium); and
- profit (or loss) appropriation.

12.9 Exercises

NOTE: when solving these exercises, always assume you are dealing with a public
limited company (i.e., a firm with capital - although the Belgian requirement
regarding minimum capital might not be met in some of the exercises)

Exercise 12.1

01/01/20X1
Incorporation of ABC. The company starts with a subscribed capital of 50.000,00
EUR (represented by 500 shares). All shares are paid up for 25% (C/A extract no.
001/X1).

01/07/20X1
ABC requires its shareholders to pay up their shares in full. In addition, ABC
increases its capital by means of a contribution in kind. More specifically, a new
shareholder brings in a van for an amount of 10.000,00 EUR (100 shares). The van
will be depreciated using the straight-line method over a period of 5 years,
assuming a residual value of 2.000,00 EUR.

01/08/20X1
All shareholders paid their shares in full (C/A extract no. 098/X1).

31/12/20X1
ABC makes a loss of 10.000,00 EUR. This loss will be carried forward to the next
accounting period.
 FINANCIAL ACCOUNTING
p. 200

31/12/20X2
ABC makes a profit of 15.000,00 EUR. Profit will be appropriated as follows:

5%  legal reserve
10%  reserve available for distribution
remainder  carry forward to the next accounting period

01/01/20X5
Once again, ABC decides to increase its capital. Equity of ABC on January 1st looks
as follows:

Capital 60.000,00 EUR

Reserves 5.000,00 EUR
Profit carried forward 12.000,00 EUR

An additional 200 shares will be issued. These shares have to be paid in full (C/A
extract no. 001/X5).

Required
Record all journal entries that result from the aforementioned data for accounting
years 20X1 up to 20X5. The closing date of the accounting year is December 31st.

Exercise 12.2

30/06/20X5
Incorporation of DEF. The company starts with a subscribed capital of 120.000,00
EUR (represented by 1.000 shares). All shares are paid up for 50% (C/A extract
no. 001/X5).

15/09/20X6
DEF requires its shareholders to pay up their shares in full.

30/09/20X6
All shareholders paid up their shares in full (C/A extract no. 054/X6).

31/12/20X6
The company makes a loss of 12.000,00 EUR. Shareholders are willing to bear the
loss for 50%. The remainder of the loss will be carried forward to the next
accounting period.
 FINANCIAL ACCOUNTING
p. 201

31/12/20X7
The company makes a profit of 9.000,00 EUR. 5% of the profit will be added to the
legal reserve and 20% will be distributed to the shareholders of the company (i.e.,
dividends). The remainder of the profit will be carried over to the next accounting
period.

Required
Record all journal entries that result from the aforementioned data. The closing
date of the accounting year is December 31st.

Exercise 12.3
On 01/01/20X5, equity of company XYZ is composed of the following items:

Capital: 100.000,00 EUR

Share premium account: 20.000,00 EUR
Legal reserve: 10.000,00 EUR
Reserve available for distribution: 35.000,00 EUR

Capital is represented by 1.000 shares.

Required
1. How many shares will XYZ have to issue if it wants to increase equity with
41.250,00 EUR?
2. Record the journal entry that results from the capital increase, under the
assumption that all shares are paid up for 60%.