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  Reserves

Introduction to Reserves

As described earlier, reserves are profits and gains that a company has made and that still form part of the equity of shareholders. One condition that past profits and gains might not go on to be part of equity is that they have been paid out to shareholders (like dividends and so on). Other reason is that reserves will be decreased through the amount of any losses that the company may suffer. In similar way that profits raise equity, losses decrease it.

Reserves are categorized as either revenue reserves or capital reserves. We should recall that this reserve presents the retained trading profits and gains of the company on the disposal of noncurrent assets. It is worth mentioning that retained earnings, because they are most frequently called; present overwhelmingly the largest source of new finance for UK (unite kingdom) companies. For several companies they amount to more than share issues and borrowings combined.

Capital reserves take place for two main reasons:

  • Issuing shares at above their nominal value (for instance, issuing £1 shares at £1.50);
  • Revaluing (upwards) non-current assets.

In which a company issues shares at above their nominal value, UK (unite kingdom) law requires that the excess of the issue price over the nominal value be displayed separately.

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