Management Theory and Studies for Rural Business and Infrastructure Development, Volume 24

Capital investment accounting methods: impact on the accounting information quality

Danutė Zinkevičienė, Valentinas Bružauskas


Capital investment is highly important in the formation of the capital structure of a business
since it is not only a tool for purchasing fixed assets but also the main source of production
potential funding. A proper selection and implementation of capital investments requires reliable
and accurate accounting information, which is obtained by choosing an appropriate accounting
methodology. In their works, scientists have analysed the impact of accounting quality on the investment
performance, however the impact of capital investment accounting methods on the
quality of accounting information has not been investigated yet. This fact determined the objective
of this study: to prepare proposals for improving capital investment accounting methodology
pertaining to the quality of accounting information.
The performed theoretical comparative analysis of scientific literature, business accounting
standards, and Lithuanian tax legislation looked into the concept of capital investment, studied
the accounting methods, and revealed their weaknesses. Induction and deduction methods led
to a conclusion that where capital investments are financed from the profits of the business, a
special reserve should be formed rather than the retained profit being used directly, seeing that
restrictions to the use of profits for other purposes, including dividends, contribute to investment
funding. It is proposed to change the current accounting methods applied to the use and withdrawal
of such reserves and to increase the authorised capital by the amount of the reserve which
has been used for capital investment. Furthermore, once the authorised/nominal capital is increased
by the used amount of the reserve, the creditors obtain a guarantee that the business has
assets that cannot be distributed among the shareholders in the form of dividends. On the other
hand, it is beneficial for the owners, too, because an increase in the par value of their shares or
equity interest suggests that they can earn more from the dividends receivable in the future or
from the sales of their shares or equity interest. Such accounting information would be more accurate
and relevant in making informed and unbiased decisions, related to the distribution of
profits or the future of the business.

Keyword(s): capital investment, reserve, accounting, amortisation, accounting information quality

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Management Theory and Studies for Rural Business and Infrastructure Development eISSN 2345-0355

This journal is published under the terms of the Creative Commons Attribution-Noncommercial 3.0 Unported License. Responsible editor: Dr Audrius Gargasas.