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How do limited companies report share capital, reserves and dividends?

The features of limited companies, ordinary and preference share capital, the difference between issued and authorised capital, reserves (share premium, revaluation and retained earnings), debentures, dividends, and the preparation of company financial statements.

A focused answer to AQA A-Level Accounting 3.1, covering the features of limited companies, ordinary and preference share capital, reserves such as share premium and retained earnings, debentures, dividends, and the preparation of company financial statements.

Generated by Claude Opus 4.812 min answerUpdated 2026-06-02

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What this dot point is asking
Features and share capital
Reserves and debentures
Dividends and the financial statements
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What this dot point is asking

AQA wants you to explain the features of limited companies, distinguish ordinary from preference shares and issued from authorised capital, account for reserves and debentures, deal with dividends, and prepare company financial statements. This is unit 3.1.11, and questions combine calculation (share capital, premium, dividends) with explanation of the equity structure.

Limited liability and separate legal personality are the defining advantages: the company can own assets, sue and be sued in its own name, and continues regardless of changes in ownership (perpetual succession). The trade-off is regulation, public filing of accounts, and the divorce of ownership (shareholders) from control (directors), which is why the stewardship role of financial reporting matters most for companies. Shares are issued at their nominal (par) value; any excess paid over nominal value is the share premium.

Reserves and debentures

The distinction between capital reserves (share premium, revaluation reserve) and revenue reserves (retained earnings) is examined directly. Capital reserves are not realised profits and cannot be paid out as dividends; company law allows them only for specific uses, such as issuing bonus shares or writing off the costs of a share issue. Only realised reserves such as retained earnings may fund a dividend, which protects creditors by maintaining the company's capital base.

Dividends and the financial statements

Equity, a share issue and a dividend

Share capital and premium

A company issues $100{,}000$ ordinary $1$ shares at $1.50$ each. Cash received $= 100{,}000 \times 1.50 = 150{,}000$ . Share capital $= 100{,}000 \times 1 = 100{,}000$ (nominal value); share premium $= 100{,}000 \times 0.50 = 50{,}000$ .

Record the issue

Debit bank $150{,}000$ ; credit ordinary share capital $100{,}000$ ; credit share premium $50{,}000$ . The two credits sit in the equity section.

Dividend

The company later pays a $10\%$ ordinary dividend. The dividend is calculated on the nominal value: $10\% \times 100{,}000 = 10{,}000$ . It is deducted from retained earnings as an appropriation, not charged as an expense in the income statement.

Debenture interest contrast

If the company also holds $50{,}000$ of $6\%$ debentures, the interest of $3{,}000$ is a finance cost in the income statement, because a debenture is a loan and its interest is the cost of borrowing, not a distribution to owners.

The equity section of the statement of financial position shows share capital plus the reserves (share premium, revaluation reserve, retained earnings); total equity plus liabilities equals total assets, the company-level form of the accounting equation.

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Q1. State the difference between an ordinary share and a debenture. [2 marks] An ordinary share is part-ownership earning a variable dividend; a debenture is a loan earning fixed interest that is an expense.

Q2. Shares with a nominal value of $1$ are issued for $1.30$ . State where the extra $0.30$ is recorded. [1 mark] In the share premium account.

Exam-style practice questions

Practice questions written in the style of AQA exam questions on this dot point, with worked answer explainers. The year tag is the paper they imitate, not the source.

AQA 20197 marksA company issues 200,000 ordinary shares of

1 each at a price of

1.40. During the year it pays debenture interest of $5,000 and an ordinary dividend of 8%. Calculate the share capital, the share premium, and explain why the debenture interest and the dividend are treated differently in the financial statements.

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A worked calculation plus an explanation of treatment.

Share capital: 200,000 shares times $1 nominal =$ 200,000 (1 mark).

Share premium: 200,000 times the $0.40 above nominal =$ 80,000, credited to the share premium account (2 marks).

Ordinary dividend: 8% of the $200,000 nominal value =$ 16,000 (1 mark).

Treatment: debenture interest of $5,000 is a finance cost, an expense in the income statement, because debentures are a loan and interest is the cost of borrowing (1.5 marks). The dividend of$ 16,000 is an appropriation of profit deducted from retained earnings, not an expense, because it is a distribution to owners (1.5 marks). Markers reward the premium calculation and the expense-versus-appropriation distinction.

AQA 20224 marksExplain the difference between authorised and issued share capital, and state why a share premium cannot be used to pay a dividend.

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A 4-mark answer needs the capital distinction and the reserve rule.

Authorised capital is the maximum nominal value of shares a company may issue, set in its constitution; issued capital is the nominal value of shares actually issued to shareholders, which may be less than the authorised amount (2 marks).

The share premium is a capital reserve, not a realised profit, so company law restricts its use to specific purposes such as issuing bonus shares or writing off issue costs; it cannot be distributed as a dividend because dividends may only be paid from realised (revenue) reserves such as retained earnings (2 marks). Markers reward the maximum-versus-actual distinction and the capital-versus-revenue-reserve reasoning.

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Sources & how we know this

AQA A-level Accounting (7127) specification — AQA (2017)