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Legal reserves (Revaluation reserve (It is a profit in accounting terms…
Legal reserves
Revaluation reserve
It is a profit in accounting terms but not a realised profit although it can become realised in certain circumstances
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Share capital
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If a company wishes to raise further capital from its shareholder, it will carry out a rights issue. The shareholders can choose to sell those rights to other people but they are often protected from their holding in the company being diluted through pre emption rights
Share premium
Sometimes shares are issued at a premium. These are treated in a similar way to share capital but can be applied in writing off the expenses of the relevant share issue and commissions relating to shares in respect of which the premium was created
It is undistributable but can be reduced or cancelled in the same way as share capital can under CA2006
Retained profits
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Represent the net profits from prior periods of trading after dividends and taxation which are available for reinvestment in the business or further distribution to shareholders
Alongside share capital, a company will show in equity various other reserves. These belong to shareholders as they are part of the residual equity balance remaining after liabilities are deducted from equity. Law or accounting requirements mean that the equity balance must be sub-divided into separate reserves
This subdivision is shown in consolidated accounts, it is the division of equity into separate reserves in the individual accounts of a company is important in legal terms
These accounts as well as being important for tax purposes are also relevant for determining which elements of equity are treated as permanent or semi permanent share capital and which are instead treated as available for distribution to shareholder
The requirement to preserve the portion of equity put in as share capital is known as the concept of the capital maintenance which acts to protect creditors of a limited company
Distributable profits: a company's accumulated realised profits (so far as not previously distributed or capitalised) less its accumulated realised losses (so far as not previously written off in a reduction or reorganisation of share capital)
Rights issue: an issue of shares offered at a special price by a company to its existing shareholders in proportion to their holding of old shares
Realised profit: usually arises from a transaction for cash or when cash is expected to be received shortly with near certainty although there are other circumstances where a profit may be classes as realised, for example if a debt is forgiven