Theory question 102
Company Accounts2. (a) Explain the following and give three examples of each: (i) capital reserves; (ii) revenue reserves. (b) Describe a company's appropriation accounts.
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(a)(i) Capital reserves are reserves not available for paying cash dividends, usually arising from capital transactions. Examples: share premium; revaluation surplus; capital redemption reserve; profit on forfeited shares; pre-incorporation profit.
(ii) Revenue reserves are profits set aside that can be used for dividends. Examples: general reserve; retained profit (profit and loss balance); dividend equalisation reserve; reserve for replacement of assets.
(b) The profit and loss appropriation account shows how the year's profit after tax (plus any balance brought forward) is used: transfers to reserves, preliminary expenses or goodwill written off, interim dividends paid and final dividends proposed on preference and ordinary shares, leaving the retained profit carried forward.
Capital reserves cannot be paid out as cash dividends; revenue reserves can.