Business Accounts - Share Capital and Reserves

Question 1

What does the bottom half of a company’s balance sheet show?

Answer 1

It shows the equity of the company, which includes called-up share capital and reserves, and it must balance with the top half of the balance sheet (net asset value).

Question 2

What are the two categories of reserves in a company balance sheet?

Answer 2

1. Capital reserves – not distributable (e.g. share premium, revaluation reserve)
2. Revenue reserves – distributable (e.g. retained earnings)

Question 3

What is ‘called-up share capital’?

Answer 3

The total amount of the nominal value of issued shares that the company has requested shareholders to pay, regardless of whether the full amount has been paid

Question 4

Does called-up share capital always equal the nominal value of issued shares?

Answer 4

No - if the shares are partly paid, the called-up value will be less than the total nominal value

Question 5

Give an example of partly paid shares and called-up capital?

Answer 5

A company issues 200,000 shares of £1 each, but only calls up 75p per share. The called-up share capital shown in the balance sheet will be £150,000.

Question 6

What is the share premium account?

Answer 6

A capital reserve representing excess paid by shareholders over the nominal value of the shares when they were issued

Question 7

Is the share premium account affected by market price?

Answer 7

No - no effect. Share premium account reflects the original issue price

Question 8

Is the share premium account distributable?

Answer 8

No - it is a capital reserve and therefore not available for dividend payments, except in exceptional cases, such as bonus issues

Question 9

What is a revaluation reserve?

Answer 9

A capital reserve created when non-current assets are re-valued upwards to reflect current market value as an accounting policy

Question 10

Why does an increase in asset value require a revaluation reserve?

Answer 10

Because the NAV in the top half of the balance sheet increases, and the bottom half must match - so the increase is added to the revaluation reserve

Question 11

Can the revaluation reserve be distributed to shareholders as dividend?

Answer 11

No, not until the asset is sold and the gain realised

Question 12

What happens if re-valued asset later decreases in value?

Answer 12

The revaluation reserve can be reduced to reflect the decline, ensuring the balance sheet remains accurate