What does capital and reserves mean in company accounts?
What is capital and reserves?
Capital and reserves is the total of the money shareholders have put into a company plus the profits it has kept. It is item K in the statutory Format 1 balance sheet, the last block of the page, and it always equals the net assets figure above it. Other names for the same total are shareholders' funds and total equity.
The five lines inside it
The Small Companies Regulations list five sub-headings under capital and reserves. Most small companies show only two or three of them.
| Line | What it is | Typical small company |
|---|---|---|
| I. Called up share capital | Nominal value of shares issued and called up | £1 to £100 |
| II. Share premium account | Amount paid for shares above their nominal value | Only after investment rounds |
| III. Revaluation reserve | Gains from revaluing assets such as property | Property-owning companies |
| IV. Other reserves | Capital redemption reserve, merger reserve and similar | Rare |
| V. Profit and loss account | Accumulated profits kept less accumulated losses | The main figure |
A company formed with one £1 share that has made £40,000 of profits and paid £25,000 of dividends shows called up share capital of £1 and a profit and loss account of £15,000: capital and reserves of £15,001.
Why it always equals net assets
The balance sheet has two halves that must agree. The top half works out net assets: everything owned minus everything owed. The bottom half, capital and reserves, explains where that amount came from. If net assets are £15,001, capital and reserves are £15,001.
When accumulated losses exceed share capital and other reserves, both totals turn negative. The profit and loss account line is then shown in brackets, and accounts often label the total "capital and reserves (deficit)" or "total equity (deficit)". See negative net assets for what that does and does not tell you.
What it tells a supplier or lender
Capital and reserves tells you how much of the business is funded by its owners rather than by creditors. Three things are worth reading:
- Share capital of £1 or £100 is normal for UK private companies and says nothing about the company's real resources. Do not read it as a sign of weakness.
- The profit and loss account reserve is the cumulative trading record. A large positive reserve built over years is a stronger sign than a single good year.
- Dividends need reserves. Under section 830 of the Companies Act 2006, a company may only make a distribution out of profits available for the purpose, broadly accumulated realised profits less accumulated realised losses. A company with a negative profit and loss reserve should not be paying dividends.
Capital and reserves in iXBRL data
In machine-readable accounts the total is tagged Equity, and the lines are tagged CalledUpShareCapital, SharePremium, RevaluationReserve and RetainedEarningsAccumulatedLosses in the FRC taxonomy. Older UK GAAP filings use ShareholderFunds for the total.
Each tag usually appears several times in one filing: for this year and last year, and broken down by share class or reserve. Reading the first Equity value you find often returns one share class instead of the total. When we fixed our iXBRL parser to choose the current-year context with no dimensions, net assets matched equity in 99.4% of filings, up from 66.6%. To see capital and reserves over time for a company, search the company.
Sources
- The Small Companies and Groups (Accounts and Directors' Report) Regulations 2008, Schedule 1
- Companies Act 2006, section 830
FAQ
Is capital and reserves the same as equity?
Yes. Capital and reserves, shareholders' funds, total equity and equity are different names for the same total on a single company's balance sheet. FRS 102 accounts tend to use "total equity" while many small company accounts keep the older "capital and reserves" heading. Both always equal the net assets figure in the top half of the balance sheet.
Why is share capital only £1 or £100?
Most UK private companies are formed with a handful of shares at a nominal value of £1 each, and the owners fund the business through retained profits or director's loans instead of issuing more shares. Low share capital is normal and does not mean the company is weak. Look at the profit and loss reserve and total net assets instead.
What does a negative profit and loss account mean?
It means the company has made more losses than profits since it started, after any dividends. If those losses are larger than share capital and other reserves, capital and reserves and net assets become negative. That is common in start-ups funded by director's loans, but under section 830 such a company cannot lawfully pay dividends until the deficit is cleared.
Where is capital and reserves in micro-entity accounts?
Micro-entity accounts show capital and reserves as a single total at the bottom of the balance sheet, often with called up share capital and the profit and loss account listed separately above it. Because micro-entities rarely publish a profit and loss account, the change in this total from the prior year column is a useful rough guide to profit or loss.
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