By Diya Mishra

Private and Public Limited

Companies
By Nitya Agrawal

REVENUE RESERVES
 Created by transferring amount from
the profit
 Transfer shown in statement of changes
in equity
 Reduces the amount available for the
payment of dividend
 Created for a specific or a general
purpose
 If excess, it can be credited back to the
retained earnings in the statement of
changes in equity and be made
available to pay dividends
RESERVES
CAPITAL RESERVES
 Created from gains arising from
particular circumstances
 They are shown as a part of the
capital structure
 They can be used for certain
specific purposes only
 They can never be credited back
to the income statement
 They can never be used to pay
cash dividends to shareholders
 RESERVES

REVENUE CAPITAL

Retained General reserve Share premium Capital Revaluation

earnings redemption Reserve

Created on Created on
Created by Created by issue of shares Created when any gain on
transferring an transferring an at premium a company revaluation of
amount from amount from buys back or non current
the profit for the the profit for redeems shares assets
year the year from existing
shareholders
 CAPITAL RESERVES
SHARE PREMIUM CAPITAL REVALUATION
REDEMPTION RESERVE
RESERVE
CAN BE USED TO CAN BE USED TO CAN BE USED TO
• Pay up unissued shares to • Issue bonus shares to • Issue bonus shares to
existing ordinary existing shareholders existing shareholders
shareholders as fully paid
of the company of the company
up bonus shares
• Write off the expenses
arising on a new issue of
shares at a premium
• Write off any commission
paid on a new issue of
shares at a premium
 ISSUE OF SHARES
No. of shares : 10000
Face value: $1

ISSUED AT PAR ISSUED AT A ISSUED AT A

PREMIUM @ $1.20 DISCOUNT @ $0.70

Bank 10000 Bank 12000 Bank 7000

Share capital 10000 Share capital 10000 Discount on issue of shares 3000
Share premium 2000 Share capital 10000
REVALUATION RESERVE
INCOME STATEMENT OF A LIMITED COMPANY
STATEMENT OF CHANGES IN EQUITY
 ASSETS
STATEMENT OF FINANCIAL POSITION Non current assets XXXX
Current assets XXXX
TOTAL ASSETS XXXX
EQUITY AND LIABILITIES
Share capital and reserves
Ordinary share capital @ $1 XXXX
Non redeemable Preference share capital XXXX
Share premium XXXX
Revaluation reserve XXXX
Capital redemption reserve XXXX
General reserve XXXX
Retained earnings XXXX XXXX
Non current liabilities
Bank loan XXXX
6% Debentures 2025 XXXX
Redeemable Preference capital XXXX XXXX
Current liabilities XXXX
TOTAL EQUITY AND LIABILITIES XXXX
DIVIDENDS
 Distributable profit = Retained earnings + profit for the year – transfer to
reserves
 Interim dividend – Dividend declared during the financial year
 Final dividend – Dividend declared at the end of the financial year after
getting it approved from the shareholders in the AGM
 Dividend policy –
 Whether sufficient distributable profits are available
 Whether cash forecast shows sufficient funds to pay dividends
 Whether how much of the profits should be transferred to reserves before giving
dividend tot strengthen the business
 Proper balance between dividend growth and capital growth
 Effect on the value of shares on the stock exchange
 DIVIDENDS

ORDINARY PREFERENCE
DIVIDEND DIVIDEND

INTERIM FINAL PROPOSED ON ON NON

REDEEMABLE REDEEMABLE
PREFERENCE PREFERENCE
SHARES SHARES
STATEMENT STATEMENT NOTE TO THE
OF OF FINANCIAL
CHANGES IN CHANGES IN STATEMENTS STATEMENT
EQUITY EQUITY EXPENSE IN
INCOME OF
STATEMENT CHANGES IN
EQUITY
NET ASSET VALUE

 Netasset value of one ordinary share =

Total value of ordinary share capital and
reserves / No of ordinary shares

 Activity 5
ORDER OF FLEXIBILITY OF RESERVES

RETAINED • MOST
EARNINGS FLEXIBLE

GENERAL • FLEXIBLE
RESERVE

CAPITAL • LEAST
RESERVES FLEXIBLE
LIABILITIES PROVISIONS RESERVES

• Amount owing by a Created to provide for Amounts set aside from the
company to trade liabilities that are known profit or other gains for some
or other creditors to exist general or specific purposes

• Can be determined Cannot be determined Created by debiting

with substantial with substantial appropriation of profit or
accuracy accuracy transferring through
statement of changes in
Created by debiting the equity and crediting
• Carry credit amounts to the income reserves accounts
balances in the statement and crediting
books of accounts to the provision
accounts Examples include general
Examples include reserve, revaluation reserve,
• Examples include
provision for etc
Trade payables,
bank loan, etc. depreciation on non
current assets, provision
for doubtful debts, etc.
BONUS ISSUE
 Free shares to existing
shareholders
 Issued from the
accumulated reserves of
the company usually in
proportion to the exisiting
shareholding
RIGHTS ISSUE
 An issue of shares made
for cash
 Shares are offered first to
existing shareholders,
usually in proportion to
the shares held by them
ENTRY TO RECORD ISSUE OF BONUS SHARES

Share premium 200000

General reserve 100000

Ordinary share capital 300000

ENTRY TO RECORD ISSUE OF RIGHTS SHARES

Bank 300000

Ordinary share capital 300000

Share premium
BONUS ISSUE RIGHTS ISSUE

 They are issued to adjust  They are issued to save time

the capital structure of and efforts needed for new
the company issue of shares and to avoid
stringent formalities
 They can also be issued in
place of cash dividends  The offer price will be below
to preserve cash for the market price usually for
future expansion the existing shareholders
 They can also be seen as
a reward to shareholders
for their continuing
investment in the
company
REDEMPTION OF DEBENTURES