A company has a different capital structure to that of a sole trader or partnership. On a formal balance sheet it is marked as ‘Capital and Reserves’. Essentially the accounts in there are just like any other and you can move money in and out of them. However accounting and company law requires that certain capital accounts exist and that certain amounts of money are ‘reserved’. These are known as the non-distributable reserves – in that any money in them cannot be used to pay dividends to shareholders. The common ones for a company limited by shares are:
Called up share capital
This is the face value of the shares in issue to all shareholders. If you have 100 shares in issue and they have a face value of £1, then the value of this reserve will be £100. It only goes up and down with the number of shares in issue. If the company buys some back it goes down. If it issues some more it goes up.
In public companies the value of this reserve can be substantial, and often a company will look to replace its (say) £1 shares with 1p shares simply so that more funds are available to distribute.
Share premium account
This is the amount of money subscribed for shares in excess of the face value. More often seen on larger companies that issue shares to third parties. If you have 100 £1 shares, and your shareholders paid £3 each for them then £100 goes in the ‘Called up share capital’ reserve, and the other £200 goes in here.
Revaluation reserve
This reserve holds the unrealised change in the value of investment holdings. Normally all assets are depreciated away – however assets held as investments are required to be revalued regularly by the accounting standards. Any increase in value over cost goes in here. When an investment is sold, the relevant proportion of this reserved is moved to one of the distributable reserves. It never goes onto the Profit and Loss account.
Distributable Reserves
A distributable reserve is anything that isn’t non-distributable. The main one is of course the ‘Profit and loss account’ which in the Capital reserves holds this year’s Profit and loss, plus any carried forward from previous years.
This can be, and often is, the only distributable reserve, but you can set up others. If you want you can create new reserves and move profit to them – for example an ‘Equipment reserve’ used to replenish equipment. Depending upon how you use your accounts you can treat the reserves in a similar way as you would a savings account.
Hopefully this short primer is useful. Questions below.
