Financial Accounting · Capital structure and finance costs

Reserves and the Statement of Changes in Equity Explained

Updated 11 October 2026 · Fact-checked

Reserves are the parts of equity other than share capital: share premium, revaluation surplus and retained earnings. The statement of changes in equity (SOCE) reconciles opening to closing balances of each component. To solve it, start with opening balances, then add total comprehensive income, share issues, and deduct dividends paid.

Understand Reserves and Statement of Changes in Equity

Equity is the owners' residual claim: assets minus liabilities. In a company it is split into share capital (nominal value of shares issued) and reserves (everything else).

There are three reserves you must know. Share premium is the amount received above nominal value when shares are issued. Revaluation surplus arises when a non-current asset is revalued above its carrying amount; the gain goes to other comprehensive income, not profit or loss. Retained earnings are the accumulated profits of the company, less dividends paid to shareholders.

You will often see reserves split into capital and revenue reserves. Capital reserves (share premium, revaluation surplus) are not available for distribution as dividends. Revenue reserves (retained earnings) come from trading profits and can normally be distributed. This split is a useful idea, but the exam usually asks you to name the actual reserve.

The statement of changes in equity shows how each component of equity moved during the year. It is a primary statement, alongside the statement of financial position and the statement of profit or loss and OCI. It is laid out in columns: share capital, share premium, revaluation surplus, retained earnings, and total.

The movements are simple. Profit for the year goes to retained earnings. Other comprehensive income, such as a revaluation gain, goes to the revaluation surplus. Share issues increase share capital and share premium. Dividends paid reduce retained earnings. A bonus issue moves amounts between reserves and share capital without changing total equity.

Key formulas to remember

Closing equity component: Closing balance = Opening balance + increases − decreases; Apply to each column of the SOCE separately, then check the total column.
Share issue for cash: Share capital increase = shares issued × nominal value; Share premium = shares issued × (issue price − nominal value); Cash received equals the sum of both.
Total comprehensive income: Total comprehensive income = Profit for the year + Other comprehensive income; Profit goes to retained earnings. Revaluation gain goes to revaluation surplus.
Retained earnings roll-forward: Closing retained earnings = Opening + Profit for the year − Dividends paid; Use dividends paid in the year, not dividends proposed after the year end.
Revaluation surplus on revaluation: Surplus = Revalued amount − Carrying amount before revaluation; Credited to the revaluation surplus via OCI. A decrease is first set against any existing surplus on that same asset.
Bonus issue (from reserves): Share capital increases; reserves decrease by the same amount; Total equity does not change. No cash is received.

How to solve Reserves and Statement of Changes in Equity questions

Use this method for any SOCE or reserves question. Build the statement column by column.

1Draw columns: share capital, share premium, revaluation surplus, retained earnings, total. Only include columns the question needs.
2Enter the opening balances from the prior statement of financial position or the information given.
3Add the profit for the year to retained earnings.
4Add other comprehensive income, such as a revaluation gain, to the revaluation surplus.
5Record share issues: nominal value to share capital, excess over nominal to share premium.
6Deduct dividends paid in the year from retained earnings. Ignore dividends not yet declared at the year end.
7Add across each column and down each row to get closing balances. Check each total column figure.
8Check that closing balances agree with the statement of financial position.

Quickest way: Column-by-column roll-forward

When to use it: Use it for number entry or multiple choice questions asking for a single closing reserve balance.

Identify which single reserve the question asks about.
Write the opening balance.
Add only items that belong in that reserve (for retained earnings: profit; for premium: excess over nominal).
Subtract only items that belong there (for retained earnings: dividends paid).
Ignore items belonging to other columns, and ignore proposed dividends.

Common mistakes in Reserves and Statement of Changes in Equity

Putting a revaluation gain into profit or loss.
It feels like income, so students include it in profit.
Fix: A revaluation gain on property, plant and equipment goes to other comprehensive income and the revaluation surplus.
Recording share premium as part of share capital.
Cash received is treated as one amount.
Fix: Split the cash: nominal value to share capital, the rest to share premium.
Deducting a proposed final dividend from retained earnings.
Students see the word dividend and deduct it.
Fix: Deduct only dividends paid or declared in the year. A dividend declared after the year end is not a liability at that date.
Thinking a bonus issue changes total equity.
Share capital goes up, so students assume equity rises.
Fix: A bonus issue moves amounts from reserves to share capital. Total equity stays the same and no cash moves.
Treating retained earnings as cash.
The word retained suggests money kept in the bank.
Fix: Retained earnings are an equity balance showing accumulated profit. Cash is an asset, and the two are not linked.
Omitting the total column or not cross-checking it.
Students rush and only fill in individual reserves.
Fix: Add across the row and down the column. The total must equal total equity in the statement of financial position.

Worked examples

Example 1

At 1 January, a company had share capital of $200,000 (ordinary shares of $1), share premium $40,000 and retained earnings $150,000. During the year it issued 50,000 new $1 shares at $1.80 each for cash, made a profit of $90,000 and paid dividends of $30,000. Calculate closing share capital, share premium, retained earnings and total equity.

Show the solution

Share capital: 200,000 + 50,000 × $1 = $250,000.
Share premium on issue: 50,000 × ($1.80 − $1.00) = $40,000.
Closing share premium: 40,000 + 40,000 = $80,000.
Retained earnings: 150,000 + 90,000 − 30,000 = $210,000.
Total equity: 250,000 + 80,000 + 210,000 = $540,000.
Check: opening equity 390,000 + cash from issue 90,000 + profit 90,000 − dividends 30,000 = 540,000.

Answer: Share capital $250,000; share premium $80,000; retained earnings $210,000; total equity $540,000.

Example 2

A company's land has a carrying amount of $300,000 and is revalued to $380,000 during the year. Opening revaluation surplus was $20,000 and opening retained earnings $120,000. Profit for the year was $60,000 and no dividends were paid. Show the movement in the revaluation surplus and retained earnings and calculate total comprehensive income.

Show the solution

Revaluation gain: 380,000 − 300,000 = $80,000, recorded in other comprehensive income.
Closing revaluation surplus: 20,000 + 80,000 = $100,000.
Closing retained earnings: 120,000 + 60,000 − 0 = $180,000.
Total comprehensive income: profit 60,000 + OCI 80,000 = $140,000.
Total equity movement from these items is $140,000, shown across the two columns.

Answer: Revaluation surplus $100,000; retained earnings $180,000; total comprehensive income $140,000.

Exam tips

In multiple response questions, look for which items go through OCI. Revaluation gains do, and profit does not.
For number entry, show your roll-forward on the scrap paper. Check that you used dividends paid, not proposed.
Know the SOCE columns and what feeds each one. Section B questions on accounts preparation often include a full SOCE.
If a question mentions cash received for shares, split nominal value from premium before anything else.
Check whether the question asks for a reserve balance or total equity. They are different answers.

Practice questions from Capital structure and finance costs

Reserves and Statement of Changes in Equity: frequently asked questions

What is the difference between capital reserves and revenue reserves?

Capital reserves, such as share premium and revaluation surplus, do not arise from trading and are generally not distributable as dividends. Revenue reserves, mainly retained earnings, come from accumulated trading profits and can normally be distributed. In the exam, you are more likely to be asked about specific reserves than the labels.

What goes in the statement of changes in equity?

It shows total comprehensive income for the year, share issues, dividends paid, and transfers such as bonus issues. Each item is shown in the column of the equity component it affects. Opening and closing balances for each column are shown too.

Why does a revaluation surplus not go through profit or loss?

The gain is unrealised, because the asset has not been sold. IFRS requires it to be shown in other comprehensive income and accumulated in the revaluation surplus within equity.

Are retained earnings the same as cash?

No. Retained earnings show how much accumulated profit has not been paid out as dividends. The company may have spent that profit on assets, inventory or repaying debt, so it need not hold the equivalent in cash.