AS-L22 — Share Capital & Reserves
Understanding how limited companies raise finance and maintain reserves within equity.
Learning Objectives
By the end of this lesson students should be able to:
• understand different types of share capital
• distinguish between ordinary and preference shares
• understand reserves
• calculate share capital values
• answer examination-style questions
Concept Framework
What is Share Capital?
Share capital represents the funds raised by a company through the issue of shares to shareholders.
Types of Shares
Ordinary Shares → shareholders receive variable dividends and voting rights
Preference Shares → shareholders receive fixed dividends before ordinary shareholders
CORE RULES
| Item | Description |
|---|---|
| Ordinary Share Capital | Main ownership capital |
| Preference Share Capital | Fixed dividend shares |
| Retained Earnings | Accumulated profits retained |
| General Reserve | Reserve created from profits |
| Dividend | Distribution of profit |
TRANSACTION LOGIC
Companies raise long-term finance by issuing shares.
Profits may either:
• be distributed as dividends
or
• retained within reserves for future growth.
Reserves strengthen the financial position of the company.
Worked Examples
Example 1 — Ordinary Share Capital
120,000 ordinary shares of £1 each issued.
Share Capital:
120,000 × £1
= £120,000
Example 2 — Preference Dividend
Preference Share Capital = £50,000
Dividend Rate = 6%
Preference Dividend:
6% × £50,000
= £3,000
Example 3 — Retained Earnings
Profit for the year = £40,000
Dividend paid = £15,000
Retained Earnings:
£40,000 − £15,000
= £25,000
📌 Additional questions are available in the 🎯 Lesson wise resources, Module wise resources, 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 share capital
Define retained earnings
Level 2 – Application Practice
Explain one difference between ordinary shares and preference shares.
Level 3 – Examination Style Question
A company has:
200,000 ordinary shares of £1 each
80,000 preference shares of £0.50 eachCalculate:
a) Ordinary share capital
b) Preference share capital
c) Total share capital(4 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 ordinary and preference shares?
2. Can you calculate share capital accurately?
3. Can you explain the purpose of reserves?
If unsure, revise the worked examples.
Detailed Activity Solutions
Solution to Level 3 question
Level 3 Answer:
Ordinary Share Capital:
200,000 × £1
= £200,000
Preference Share Capital:
80,000 × £0.50
= £40,000
Total Share Capital:
£200,000 + £40,000
= £240,000
How This Topic Appears in the Examination
This topic commonly appears as:
• share capital calculations
• reserves and retained earnings questions
• company finance theory
Examiners assess:
• correct classifications
• accurate calculations
• understanding of company equity structure
Self-Assessment Checklist
I understand share capital
I understand reserves
I can distinguish ordinary and preference shares
I can calculate share capital correctly
I can answer exam questions confidently
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PREMIUM RESOURCES
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VIDEO ON DEMAND
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