Share Capital & Reserves (Cambridge (CIE) AS Accounting): Revision Note

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

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