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Difficulty: EasyReserves and Capital Structure

Match each company reserve item in Column A with its correct classification and characteristic in Column B.

  • Share Premium AccountCapital reserve created from issuing shares above par value, strictly restricted by law regarding its usage.
  • General ReserveRevenue reserve created out of distributable profits to strengthen financial position without specific restriction.
  • Revaluation ReserveCapital reserve resulting from an upward revision of the carrying value of non-current assets.
  • Retained EarningsRevenue reserve comprising accumulated unappropriated net profits available for dividend distribution.

Answer

Share Premium Account matches with statutory capital reserve from issuing shares above par; General Reserve matches with revenue reserve created out of distributable profits; Revaluation Reserve matches with capital reserve from upward asset revaluation; Retained Earnings matches with revenue reserve of accumulated undistributed net profits.
Share Premium and Revaluation Reserve are capital reserves created from non-trading or statutory sources and asset revaluations. General Reserve and Retained Earnings are revenue reserves created out of operational net profits.

Step-by-Step Solution

1
Distinguish between Capital Reserves and Revenue Reserves.
Capital reserves (Share Premium, Revaluation Reserve) arise from non-trading activities or statutory requirements and cannot be distributed as cash dividends. Revenue reserves (General Reserve, Retained Earnings) are created out of trading profits.
Correct classification requires understanding the source of funds and dividend availability.
2
Identify specific characteristics of each reserve item.
Share Premium represents excess price over par value. Revaluation Reserve records unrealized asset appreciations. General Reserve is allocated for general contingencies. Retained Earnings carries forward undistributed profit.
Each reserve serves a distinct accounting function within equity.
3
Match each item in Column A to its description in Column B.
Share Premium -> Capital reserve from share issue above par. General Reserve -> Revenue reserve from distributable profits. Revaluation Reserve -> Capital reserve from asset revaluation. Retained Earnings -> Revenue reserve of undistributed net profit.
Verifies precise definitions.

Key Concept

Classification of Capital Reserves and Revenue Reserves in Company Equity
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Topics

Reserves and Capital Structure

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