Equity Components and Profit and Loss Account Structures

Heritage and Equity

Social Capital

Social capital represents the portion of assets provided by shareholders. This capital stock can consist of common or preferred shares. In the balance sheet, any unpaid share capital must be subtracted from the total.

Surplus

The term surplus refers to an excess, leftovers, or waste; in general, it is the surplus remaining after satisfying a specific use or need. Surplus is the most appropriate term for earnings, though it is subject to availability. It can originate from:

• Normal operations: Operating surplus.
• Capital gains: Profits on the issuance of shares (capital surplus).
• Donations: Donated surplus.
• Revaluation of assets: Asset revaluation surplus.

Reservations and Retained Earnings

The retained earnings reserve accounts represent the economic strength of a company or are set aside for a particular purpose. These include:

Legal Reserves

The laws of a nation may determine that certain entities, if they make a profit, must set aside a certain amount of those proceeds to create a reserve. This implies a total ban on the distribution of these profits. In Venezuela, the Commercial Code requires that any net profits earned by corporations must set aside 5% for the formation of a reserve account until the account reaches 10% of its share capital.

Statutory Reserves

These are governed by statutes and contracts that shareholders accept to regulate the life of the society.

Voluntary Reserves

The shareholders of a corporation may voluntarily set aside a portion of profits for various purposes.

Profit and Loss Accounts

In this area, there are many accounts which we believe are mostly descriptive, as their names almost completely encompass the concept, such as: sales, purchasing, returns on sales, and discount sales. Below is a summary of accounts that contain more complex concepts:

Cost of Sales

This account monitors all costs incurred in the sale of goods or services supplied by the company. These are broken down into as many sub-accounts as there are types of costs or expenses to control. For example, advertising expenditures, commissions, and travel expenses. Advertising (propaganda) is, in turn, broken down into TV, radio, film, and media.

Administration Expenses

Administration costs are of the same nature as the previous account, but in this case, they control the costs incurred for general administration. These can also be subdivided into as many categories as needed to control costs or expenses, such as salaries, rent, cleaning, and depreciation.

Miscellaneous Expense and Income

In these accounts, certain expenses and income from operations different from normal business activities are recorded, representing extraordinary and distinct operations for each company. It would be incorrect to expense these under Sales or Administration, or to subscribe them to the proceeds of normal sales or services. Among others, these include:

• Borrowing costs
• Gains on stock issuance
• Revenue from buildings
• Profits or losses on the sale of fixed assets