Shares and reserves summary & a limited company balance sheet

Limited company accounts- key terminology

Authorised Share Capital

This signifies the upper limit of shares a firm is allowed to sell.  It needs to get the laws changed to sell more than this.

Balance sheet extract

Shares & Reserves

Authorised Share Capital                            £

500,000 x 50p shares              250,000

Issued share capital

The amount of shares that have actually been distributed to shareholders.  This cannot exceed the Authorised Share Capital and is the figure

Balance Sheet extract

Shares & Reserves

Issued Share Capital                             £

400,000 x 50p Shares                      200,000

Nominal Value of a share

The ‘face’ value of each share when first agreed to be sold with company’s house.  The share does not have to be sold at this and they are often sold at a premium.  In the above example it was set at 50p

Market Value of a share

The current market trading price of a share – this is usually higher than the nominal value of a share.  This may change on a regular basis depending upon demand and supply for the share.

Share Premium account

When a share is sold at a higher price than the nominal value (i.e. during a rights or share issue).  If a share with a nominal value of 50p is sold for 70p the remaining 20p of capital goes in the share premium account.  This is a non trading profit and is called a CAPITAL RESERVE.

Revaluation reserve account

When non-current assets are revalued and go up in value the difference goes in here.  If NCA s go up from £2m to £10m (a total increase of £8m) then Capital must go up by £8m because Assets – Liabilities = Capital.  This usually applies to Buildings.  It is a Non trading Profit (like Share Premium) and goes under the Capital Reserves heading!

General Reserve

These are trading profits from normal activities (think Tesco selling groceries) and go under the heading Revenue Reserves.  Sometimes companies transfer reserves from the Retained Earnings (Profit & Loss a/c) to the general reserve.  The value of the business is unchanged – it is a paper exercise.

Retained Earnings

These are profits made from normal trading activities accumulated over the years. If a company makes a profit it rises by that amount and if it makes a loss it falls by that amount.  It is a Revenue Reserve as it comes from trading profits!

NB All reserves are not money.  They simply highlight where the funds have come from to make it worth what it is! Money is in the bank usually!!!

Below is a sample of a Limited Companies Balance sheet