my boss wanted to top up the capital via amount due to directors , is it possible ? could it affect the retained earning? what is the double entry ?
DR Amount due to directors
CR Share capital
Replies (8)
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Your entry is basically right, but there are formalities to go through to issue the new shares first. The accounting entry reflects the issue of shares. It does not of itself effect the new issue.
Why do you think it might affect retained profits?
To add to what others have suggested, if no additional shares issued for the top-up, the entry will be a credit to Share Premium Account (instead of Share Capital). A simple contribution agreement and a board resolution authorising this will suffice.
Do you mean the capital contribution can be treated as further consideration for shares issued in the past, which was not foreseen at the time of that issue? I have never seen such a transaction.
What I understood from the query is that an owner or shareholder (term used as "boss") want to top-up capital ie capitalise further using a DLA which in this case is a negative balance on the balance sheet (payable to director [***] shareholder) of the entity in question. If this is the case, yes further capital contribution can be done without issuing any shares. It will be a non-statutory form of capital which increases the equity and improves gearing.
If it’s non-statutory capital, it’s presumably outside the scope of the Companies Act (which will be why I have never heard of it). So we are into free-for-all, make-it-up-as-you-go-along territory? The creditor presumably just self-declares it to be new capital without relinquishing his right to claim repayment on demand?
I think the DLA is a credit balance by the way. I don’t know what “negative” means in this context.
Yes, it is outside the scope of Companies Act, however, in practice it is still part of equity and sits under equity on balance sheet. Correct, creditor relinquishing his right to claim the amount.
As regards DLA, I meant credit balance only (ie negative balance based on conventional signage).
Reading the discussion so far, this looks like a "capital contribution", much loved by US companies.
Look at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg43500