3Spoken

October 19, 2006

Company Capital Reserves – what are they?

Filed under: Running a Limited Company — NeilW @ 1:53 pm

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.

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7 Comments »

  1. Hi NeilW,
    Thanks for this. I arrived here from TMF – good luck with the blog! You asked for suggestions – how about something on the pros and cons of going PAYE with your own limited company? My partner and I started our company a little under three months ago, and we were going to go down the paying ourselves a minimum wage route. But so far, we haven’t really taken any money out of the company, only repaying some of the Directors’ loans. I am now trying to pin down what exactly are the advantages / disadvantages of going down the PAYE route, and the same for the other options.

    Well you did ask! 😉
    cheers,
    Andrew. (dd on TMF)

    Comment by Andrew — October 20, 2006 @ 4:28 pm | Reply

  2. please give hte meaning of reserve, non-distributable reserve and distributable reserve

    thnaks

    Comment by AJAY — October 6, 2007 @ 7:51 am | Reply

    • when i am inroducing share capital into the business we have share capital account and which other leg?

      Comment by thomas — November 13, 2012 @ 1:36 pm | Reply

      • Cash/Bank Asset Account if you have introduced money.

        Comment by NeilW — November 13, 2012 @ 5:34 pm

  3. Enjoyed reading your article. I made sure to bookmark your site for future reference.

    Comment by Accounting — May 16, 2008 @ 12:03 am | Reply

  4. What accounting standard or source document specifically say that we cannot touch revaluation reserve for recapitalization of a company.

    Comment by Lulu — September 2, 2009 @ 2:21 pm | Reply

  5. When a company has sold a capital asset and the proceed (after CGT has been paid) is put into a Capital Reserve Account what is the most tax effective manner to distribute the proceed to shareholders. Keeping in mind that dividends cannot be declared from the reserve

    Comment by Ahmed — May 23, 2015 @ 9:57 pm | Reply


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