How to record the increase of share capital?
Usually it is necessary to increase share capital when additional shareholders join the company, the company expands or if as a result of the company’s economic activities its equity decreases below the minimum requirements stipulated in the Commercial Code.*
If share capital is increased by monetary contribution, the company’s cash and share capital are increased with a corresponding accounting entry. If share capital is increased in connection with the equity having decreased below the requirements stipulated in the Commercial Code*, the contribution is usually made for the shares above par, with premium, in order to meet the requirements of the Commercial Code. In such case the accounting entry is the following:
Dt Cash
Ct Share capital
Ct Share premium
If share capital is increased by non-monetary contribution, the value of the assets for accounting purposes is the value that has been agreed upon in the decision regarding increase of the share capital and determined by the evaluators. That amount shall be the acquisition cost of those particular assets for the company. Here it is not important how much the person who made the non-monetary contribution, paid for the asset upon acquisition or what was the asset’s value in the accounting of the person who made the non-monetary contribution before the contribution was made.
In a situation where the company’s net assets have decreased below the requirements of the Commercial Code, the contribution is often made by waiving the claim, especially if the company has a parent from whom the company has received financial support for continuing its business activities. If share capital is increased by the other party waiving the claim, the following accounting entry is made:
Dt Liability against waiver of the claim
Ct Share capital
(Ct Share premium)
_ _ _ _ _
* The company’s net assets are not in compliance with requirements of the Commercial Code – i.e. equity is smaller than half of the share capital or the minimum capital prescribed by law for that type of company (40 000 euros in case of a private limited company and 400 000 euros in case of a public limited company).