Limited companies — common mistakes

In the Statement of Financial Position, always show the full description of share capital. For example, '500,000 Ordinary Shares of $1 each'. This demonstrates a clear understanding of the capital structure.

Be precise with the double-entry for a share issue. A common error is to credit the entire cash proceeds to the Share Capital account. Remember to split the amount between Share Capital (nominal) and Share Premium.

Remember that only paid dividends (interim) and declared final dividends affect the Statement of Changes in Equity. A proposed final dividend is only disclosed in the notes to the accounts and does not reduce retained earnings for the current period.

No. Dividends are not an operating expense and do not appear in the calculation of profit for the year. They are an appropriation of profit, meaning a distribution of profit to the owners (shareholders). They are shown in the Statement of Changes in Equity as a deduction from retained earnings.

No, this is a common misconception. The Share Premium account is a capital reserve, not a revenue reserve. It represents capital contributed by shareholders above the nominal value of shares and is not legally distributable as cash dividends. Its uses are restricted, for example, to issuing bonus shares.

Not at all. Authorised share capital is simply the maximum nominal value of shares the company is legally permitted to issue. The actual capital raised is the 'issued and paid-up' capital. A company may have authorised capital of $1,000,000 but may have only issued $200,000 of shares, raising cash only for that specific issue.

A capital reserve (like Share Premium or Revaluation Reserve) arises from non-trading activities, such as issuing shares or revaluing assets. It is generally not distributable as cash dividends. A revenue reserve (like Retained Earnings) is created from accumulated trading profits and is legally available for distribution as dividends.