A2-L09 — Company Reserves & Capital Structure
Understanding how companies manage reserves, financing sources, and capital structures.
Learning Objectives
By the end of this lesson students should be able to:
• understand company reserves
• distinguish between revenue and capital reserves
• understand capital structure
• analyse sources of company finance
• answer examination-style questions
Concept Framework
What are Company Reserves?
Company reserves are accumulated amounts retained within the business for future use or financial stability.
Types of Reserves
Revenue Reserves → created from retained profits
Capital Reserves → created from capital transactions such as share premium or revaluation
CORE RULES
| Reserve Type | Source |
|---|---|
| Retained Earnings | Undistributed profits |
| General Reserve | Transfer from profits |
| Share Premium | Shares issued above nominal value |
| Revaluation Reserve | Increase in asset valuation |
| Capital Structure Component | Meaning |
|---|---|
| Equity Finance | Share capital and reserves |
| Loan Capital | Long-term borrowings |
| Gearing | Relationship between debt and equity |
TRANSACTION LOGIC
Reserves strengthen the financial position of a company and provide funds for future expansion or unexpected losses.
Capital structure refers to how a business finances its operations through a combination of:
• equity finance
and
• long-term debt.
Businesses must balance profitability, risk, and financial stability when choosing financing methods.
Worked Examples
Example 1 — Share Premium
A company issues shares with nominal value:
£1
Issue price:
£1.50
Share Premium per share:
£0.50
Example 2 — Retained Earnings
Opening retained earnings:
£80,000
Profit for the year:
£30,000
Dividends:
£12,000
Closing retained earnings:
£98,000
Example 3 — Capital Structure
Equity:
£300,000
Long-term loans:
£150,000
The business uses both equity and debt finance.
📌 Additional questions are available in the 🎯 Question Papers + YouTube Explanation section.
Students should practise explanation questions regularly to improve examination performance.
Enrolled students may submit questions from recognised textbooks, past examination papers, or other academic material for expert clarification through the Student Doubt Support facility.
Structured Practice
Level 1 – Concept Check
Define retained earnings
Define share premium
Level 2 – Application Practice
Explain one advantage and one disadvantage of using loan finance.
Level 3 – Examination Style Question
Opening retained earnings:
£60,000Profit for the year:
£25,000Dividends paid:
£8,000Calculate closing retained earnings.
(3 marks)
📌 Additional structured questions are available in the 🎯 Question Papers + YouTube Explanation section.
∗ Additional structured questions are available in the Question Papers and YouTube Explanation section. Students should practise regularly and review video explanations for procedural clarity.
Enrolled students may submit questions from recognised textbooks, past examination papers or other genuine academic material for expert clarification through the Student Doubt Support facility.
Proficiency Check
Learn → Unlearn → Relearn
1. Can you distinguish between revenue and capital reserves?
2. Can you explain capital structure logically?
3. Can you calculate retained earnings accurately?
If unsure, revise the worked examples.
Detailed Activity Solutions
Solution to Level 3 question
Level 3 Answer:
Closing Retained Earnings:
£60,000 + £25,000 − £8,000
= £77,000
How This Topic Appears in the Examination
This topic commonly appears as:
• reserves calculations
• company financing questions
• capital structure evaluation questions
Examiners assess:
• understanding of company finance
• accurate calculations
• logical evaluation of financing choices
Self-Assessment Checklist
I understand company reserves
I can distinguish revenue and capital reserves
I understand capital structure
I can calculate retained earnings accurately
I can answer examination questions confidently
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