Share Capital & Reserves (Cambridge International A-Level Accounting)

Spec point — the distinction between capital reserves (share premium and revaluation reserve) and revenue reserves (retained earnings and general reserve)

Share capital & reserves

What is equity?

• Equity is the net value of the company for the shareholders

  • It is similar to capital of a sole trader

  • It obeys the accounting equation

    • Assets = Liabilities + Equity

• Equity is made up of share capital and reserves

What types of share capital do I need to know about?

• The main type of share capital is the money raised by issuing ordinary shares

• This is the main source of finance used by limited companies to fund their startup or setup

• They are also known as equity shares

• Ordinary shareholders are the owners of the company and they have voting rights

• The dividend received by ordinary shareholders is not a fixed amount

  • Ordinary shareholders may have a high return on their investment if the company makes good profits during the financial year
  • The company may withhold paying dividends if their financial year was not as profitable as expected

• Dividends for ordinary shares are not accrued and only affect the financial statements when they are paid

Exam Hint There are other types of shares such as preference shares. However, you only need to know about ordinary shares for your exam.

What types of reserves do I need to know about?

• You need to know the features of capital and revenue reserves

• Capital reserves include:

  • Share premium

    • A reserve generated when shares are sold at a higher price than their nominal value

  • Revaluation reserve

    • A reserve generated when non-current assets are revalued upward

• Revenue reserves include:

  • Retained earnings

    • The profits that are not distributed via dividends

  • General reserve

    • The money set aside for general purposes