INTERNATIONAL JOURNAL ON ECONOMICS, FINANCE

AND SUSTAINABLE DEVELOPMENT

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Vol. 5 No. 10 | October 2023

FEATURES OF ACCOUNTING EQUITY CAPITAL COMPONENTS

Sherimbetov Inomjon Xalilullayevich

Independent researcher, Tashkent institute of Finance., Uzbekistan

ABSTRACT ARTICLEINFO
Equity capital is of great importance in ensuring the financial stability Article history:
of commercial organizations. In particular, reserve and retained earnings, Received 10 Sep 2023
which are a component of equity capital, reflect the result of the company's Received in revised form
financial and economic activities. The growth of equity capital indicates the 19 Sep 2023
efficiency of the company. Of course, in this case, the interests of the Accepted 10 Oct 2023
company's shareholders and creditors will be protected by their correct
accounting. The article describes the features of accounting for reserve Keywords:
capital and retained earnings based on national and international standards. equity capital, reserve capital,
___________________ revaluation adjustments of long-
term assets, assets received for
© 2023 Hosting by Research Parks. All rights reserved. free, retained earnings.

INTRODUCTION
In the conditions of modernization of the economy, as the importance of financial resources, the
production potential of the company, as well as the fulfillment of the tasks of financing the activities of
the company. The financial stability of the company depends on the funds that are the result of its activity,
the appropriateness of their structure, and the formation of fixed and circulating funds in accordance with
the purpose. Also, reliable accounting information is an important factor in ensuring investment
attractiveness and attracting investors. The purpose of accounting is to present financial statements
prepared on the basis of reliable accounting information to investors, creditors and other interested parties.
Assets, liabilities, equity, income, expenses, profits and losses of a business entity are considered
important indicators for investors. In particular, among these indicators, equity capital and its elements
are also important. In this article, the author describes the components of equity capital, added capital,
reserve capital and retained earnings, features of the account.
LITERATURE REVIEW
Avlokulov A. asserts that capital, profit, income, cost, tax and turnover indicators reflect the
overall financial profile and play a central role in strategic management and decision-making. In a wider
horizon, financial indicators are classified as liquidity, operational, profitability, debt and market
indicators. However, the overall profitability indicator has already become out of interest, as it cannot

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Vol. 5 No. 10 | October 2023 56

provide the real scene of the company's financial position. Shareholders' focus mainly concentrated on
the indicators how the company is working for covering their investments [3].
Papanastasopoulos, G., Thomakos, D. and Wang, T. notes that investors act as if the components
of retained earnings (current operating accruals, non-current operating accruals and retained cash flows)
have similar implications for future profitability, leading to an overvaluation of their differential
persistence. It also appears that while they cannot distinguish between the distinct properties of distributed
earnings, they correctly anticipate the persistence of net cash distributions to debt holders (net debt
repayment) but underestimate the persistence of net cash distributions to equity holders (dividends minus
net stock issues). Overall, the findings of the paper suggest that the accrual anomaly documented in the
accounting literature and the anomaly on net stock issues documented in the finance literature could be a
subset of a larger anomaly on retained earnings [4].
Kevin Keasey, Paul B. Mc Guinness note that a positive association between the fraction of equity
retained by pre-listing owners and earnings growth. However, this association weakens somewhat beyond
the first two accounting year-ends post-listing. Significantly, earnings appreciation appears markedly
weaker for issuers going to market with a secondary offer component within their overall IPO [5].
Scientists have noted that equity capital components have a positive effect on the going concern,
the level of investment attraction and the growth of the company's stock prices. For this purpose, the
correct formation of financial information on the account of equity capital is an urgent issue.
ANALYSIS AND RESULTS.
According to the Law «On Accounting», the equity capital consists of authorized capital, added
capital, reserve capital and retained earnings (Fig. 1).

EQUITY CAPITAL

Authorized capital Added capital Reserve capital Retained earnings

Adjustments from revaluation

Property received for free Reserve capital
of long-term assets

Figure 1. Structure of equity capital1

If we look at this picture, the structure of equity capital consists of authorized capital, Added
capital and retained earnings, as well as reserve capital. Added capital is generated from income or
exchange rate difference when the authorized capital is initially formed.
Reserve capital is formed from adjustments from revaluation of long-term assets, reserve capital
and the value of property received for free.
According to the international standards of financial reporting, the accounting of equity capital
and its presentation in the financial statements are different compared to the national accounting
standards. According to international standards, reserve capital includes reserves as a distributed part of
net profit and as an adjustment for capital maintenance. To these, when the reserve is allocated from the
net profit, the net profit accounting account is debited, and the reserve account is credited, we can cite as
an example operations that provide for the transfer of a certain amount of the adjustment amount resulting

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Vol. 5 No. 10 | October 2023 57

from the revaluation of fixed assets to the reserves representing the adjustment to maintain capital to the
net profit at the end of the reporting period.
In accordance with the international standard, according to the concept of capital maintenance, if
the business entity has the same amount of capital at the end of the reporting period as at the beginning
of the reporting period, it ensures the capital maintenance. Any amount in excess of the amount necessary
to maintain the capital at the level of the state at the beginning of the reporting period is considered a
profit for the business entity, that is, in this case, the entity is considered to have effectively organized
financial and economic activities.
Reserve capital is formed in accordance with the requirements of legal documents or founding
documents. In accordance with the Law «On Protection of Joint-Stock Companies and Shareholders'
Rights», a reserve fund is established in the amount of not less than fifteen percent of the authorized
capital of the company, provided for in the charter of the company. The company's reserve fund is formed
through annual mandatory deductions from the net profit until it reaches the amount specified in the
company's charter [1]. Also, according to this law, the company is given the right to form other funds.
According to the Law «On Limited Liability and Additional Liability Companies», the company may
create a reserve fund in the amount provided for in its charter, but not less than fifteen percent of its
charter fund (charter capital) [2]. The reserve fund of the company is formed by making deductions from
the net profit every year until it reaches the amount specified in the charter of the company.
Thus, the formation of a reserve fund is mandatory for joint-stock companies, and optional for
limited liability companies. The purpose of creating funds specified in the charter is to reduce risks,
stabilize the activity of the business entity, and protect the interests of owners and creditors. The use of
reserve capital is used only for the purposes specified in the legislation and the charter, i.e. compensation
for company losses, cancellation of corporate bonds of the company, payment of dividends on preferred
shares and repurchase of the company's shares. Its use for other purposes is limited by law.

60,5 53,9
39,4 34,5
80,0 48,6
20,1
60,0 25,7 24,7
17,3 16,2
40,0
13,5 11,7 12,2 14,5 14,7
20,0
0,0
2018 y. 2019 y. 2020 y. 2021 y. 2022 y.

"Dunyo-М" JSC "Galla-Alteg" JSC "Toshkentdonmahsulotlari" JSC

Figure 2. Share of reserve capital of grain processing companies in equity capital , in

percent2.
In this picture, the share of the reserve capital of «Dunyo-M» JSC, «Galla-Alteg» JSC, and
«Tashkentdonmahsulotri» JSC from 2018 to 2022 in equity capital was studied. If we look at the data of
Figure 2, the share of reserve capital in equity capital in «Dunyo-M» JSC is kept at the same level. That
is, the reserve capital was formed in proportion to the retained earnings. In the rest of the companies, in
particular, in JSC «Galla-Alteg» JSC, «Tashkentdonmahsulotri» JSC, the amount of reserve capital can
be estimated as sufficient for the normal operation of the company.
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Vol. 5 No. 10 | October 2023 58

In the international standards of financial reporting, property received for free is not included in
the capital structure. According to them, the free property can be given under certain conditions, and its
accounting is regulated on the basis of the National Accounting Standard No. 20 entitled «Accounting
for State Grants and Disclosure of Information on State Assistance». In our national standards, property
received for free is not recognized as income for accounting purposes. In our opinion, we think that it is
necessary to remove the free property from the capital structure, aligning our national accounting system
with the requirements of international standards.
In practice, the only source of reserve capital formation in business entities is deductions from net
profit. 8500-»Reserve capital» accounting accounts are used to account for operations with reserve capital
. The accounting entry for the formation of reserve capital is recorded after the annual general meeting of
shareholders (participants) and on the basis of the minutes of the meeting or an extract from the minutes
drawn up in the established order. However, the minutes of the meeting alone are not sufficient to record
the accounting entry. Because it does not contain the requisites of initial accounting documents that are
the basis for recording accounting records. In accordance with the Law «On Accounting», the initial
accounting documents must contain the following mandatory details (Fig.):

name of the accounting entity

the name of the document

document number

date and place of document creation

name, content of economic operation

units of measure (in kind and money)

surname, first name, patronymic, position, signature of the person who performed the economic operation

Figure 3. Mandatory requisites of initial account documents3.

In order to fulfill the requirements established by the law, an accounting reference is prepared,
which is considered an initial document, based on the minutes of the general annual meeting of
shareholders, and on the basis of this document, the allocation from the net profit to the account of the
reserve capital is credited to the account 8520- «Reserve capital (fund)» and 8710-»Retained earnings of
the reporting period (unrecovered loss) )» account is recorded with an accounting entry.
The use of reserve capital is under the authority of the supervisory board of the company. When
reserve capital is used to compensate for company losses, we debit account 8710-«Retained profit of the
reporting period (unreimbursed loss)» and credit account 8520- «Reserve capital (fund)». If the amount
of the damage is greater than the amount of the reserve capital, then the authorized body of the company
must determine from what sources the remaining part of the damage will be covered. In this case, damages
can be compensated from the accumulated profit of the company or from another item of equity capital
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Vol. 5 No. 10 | October 2023 59

provided by the legislation.

It should be noted that the organization of the analytical account of reserve capital in company is
of great importance. In our opinion, companies should separately reflect the composition of accounts that
allow analytical accounting of reserve capital in the accounting policy (Fig. 4).

8511-Reserve to cover losses

8512-Reserve for redemption of corporate bonds

8510- Reserve capital

8513-Reserve for the payment of dividends on preferred shares

8514-Reserve for repurchase of shares

8515-Other reservs established by law

Figure 4. Plan of working accounts for organization of analytical accounting of reserve capital in
joint-stock companies4

In our opinion, the use of this working account allows for the correct and reliable formation of
accounting information, that is, confirmation that the reserves are used for the specified purposes in
accordance with the law.
Information on reserve capital is reflected in line 430 of the balance sheet of Form 1 of the
financial reporting forms at the beginning of the reporting period and at the end of the reporting period.
In this line, the inflation reserves formed during the revaluation of long-term assets, the reserve formed
at the expense of deductions from the net profit, and the value of property received for free are recorded
in summary. Also, in this line, in accordance with the «Rules for filling out financial reporting forms»,
the amounts of tax credits for the payment of customs duties, budget taxes and mandatory payments are
reflected, provided that the funds freed up as a result of exemption from taxation are directed to the
performance of targeted tasks in accordance with the procedure established by law. In this case, when the
funds freed from tax benefits are directed to the purchase of fixed assets, intangible assets, tangible assets,
repayment of loans and debts, reconstruction and modernization of fixed assets, account 8840-«Targeted
tax benefits» is debited and account 8530 «Property obtained for free» is credited. .
Retained earnings play an important role in equity. The company determines its financial results
by comparing income and expenses for the reporting period . If the income exceeds expenses, it means
that the company ended the accounting period with a profit, if the income is less than the expenses, it
means that the accounting period ended with a loss. For accounting purposes, retained earnings is an
indicator that is determined as a positive financial result at the end of the year by comparing the income

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Vol. 5 No. 10 | October 2023 60

and expenses incurred during the year. Retained earnings also include the accumulated net profit of
previous years left over from payments made by the company for indemnification and other purposes.
The word «retained earnings», which is an important item of accounting, refers to the fact that the
company has not distributed profits to shareholders as dividends.
In our opinion, we can also interpret the retained profit as a surplus of profit, and it reflects a
reserve that is reinvested in the business by the decision of the company's management. Ensuring the
company's year-on-year increase in retained earningss is an important factor in evaluating the efficiency
of their activities. Figure 5.
90,0 81,5 82,5
80,0 74,5 72,3 73,7

70,0
59,6
55,7 56,9
60,0 53,1 54,0

50,0 58,2 42,9

47,1
50,4 36,0
40,0
30,4
30,0 24,2

20,0
7,0
10,0
0,0
2018 y. 2019 y. 2020 y. 2021 y. 2022 y.

"Dunyo-М" JSC "Galla-Alteg" JSC

"Jizzaxdonmaxsulotlari" JSC "Toshkentdonmahsulotlari" JSC

Figure 5. The dynamics of the share of retained earnings of grain processing companies in
equity capital , in percent5.
Figure 5 analyzed the growth dynamics of the share of retained earnings of grain processing
companies in the structure of equity capital . According to him, the best indicator belongs to «Galla-
Alteg» JSC, in 2018-2022, the share of retained earnings in the structure of equity capital of the company
increased from 47.1 percent to 82.5 percent. So, it indicates the growth of the company's retained earnings
during 2018-2022. The share of retained earningss of «Dunyo-M» JSC in equity capital did not undergo
large fluctuations, that is, it kept between 50-60 percent. The share of retained earnings of JSC
«Tashkentdonmahsulotlari» decreased from 74.5% to 42.9%. The main reason for this is that the share of
reserve capital in the company's equity capital increased from 20.1 percent to 53.9 percent in 2018-2022.

CONCLUSION.
1. Taking into account the introduction of international financial reporting standards, it is
necessary to revise the composition of reserve capital, which is a equity capital component. In particular,
in our opinion, it is appropriate to remove the line of property obtained for free from the composition of
equity capital and reflect it in the composition of liabilities. Because in accordance with the international
financial reporting standards, it is noted that the property is transferred to the company under certain
conditions, and it is required to be separately reflected in the liabilities.
2. It should be noted that the aim of using the reserve capital are clearly defined in the
legislation. In this case, a separate worker in the accounting policy of the company for the purposes of

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Vol. 5 No. 10 | October 2023 61

compensation for losses, withdrawal of the company's corporate bonds from circulation, payment of
dividends on preferred shares and repurchase of the company's shares for the purposes of correct
formation of the analytical account according to the scheme 8510-«Reserve capital» intended for keeping
the account of the reserve capital By approving the account of accounts, the appropriateness and reliable
reflection of financial information is ensured.
3. We believe that the company should determine the amount of retained earnings and
allocations from it to reserve capital at the end of the reporting year in its charter and analyze their
dynamic changes in the structure of equity capital . Through the analysis, control of the provision of the
concept of preservation of equity capital is carried out, that is, the difference between the amount of equity
capital at the end of the reporting year and the amount of equity capital at the beginning of the reporting
year indicates that the company ended the reporting year with a profit.
REFERENCES:
1. Law of the Republic of Uzbekistan «On joint stock companies and protection of shareholders'
rights» 06.05.2014 . No. LRU-370 . https://lex.uz/docs/4617583
2. Law of the Republic of Uzbekistan «On limited and additional liability companies»
06.12.2001. No. 310-II . https://lex.uz/docs/4607985
3. Anvar Avlokulov, « Return on Assets and Financial Soundness Analysis: Case Study of Grain
Industry Companies in Uzbekistan ,» International Journal of Management Science and Business
Administration , Inovatus Services Ltd., vol. 4(6), pages 52-56, September.
4. Papanastasopoulos, G. , Thomakos, D. and Wang, T. (2010), «The implications of retained
and distributed earnings for future profitability and stock returns», Review of Accounting and Finance ,
Vol. 9 No. 4, pp. 395-423. https://doi.org/10.1108/14757701011094599
5. Kevin Keasey, Paul B. McGuinness. (2008), «Firm value and its relation to equity retention
levels, forecast earnings disclosures and underpricing in initial public offerings in Hong Kong»,
International Business Review , Volume 17, Issue 6 , December 2008, Pages 642-662

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