Financial Accounting · Disclosure notes

Share Capital, Reserves and Dividends Notes Explained

Updated 11 October 2026 · Fact-checked

These notes give detail behind the equity section of the statement of financial position. You show issued share capital by class, then each reserve (share premium, revaluation surplus, retained earnings) with its movements, and dividends paid or proposed. Work out each balance, check it agrees to the statement, and place dividends correctly.

Understand Share Capital, Reserves and Dividends Notes

The statement of financial position shows equity in a few lines. Notes give the detail users need. They explain what makes up share capital and each reserve, and how each moved during the year.

Share capital note: for each class of shares (ordinary, preference), you show the number of shares authorised or issued, the nominal (par) value and the amount issued and fully paid. Only the nominal value goes in share capital. Any amount received above nominal value goes to share premium.

Share premium is a capital reserve. It arises only when shares are issued above par. It is not profit, so it cannot be paid out as a normal dividend. 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, and is then held in this reserve. So share premium comes from owners paying in cash, while revaluation surplus comes from an unrealised gain on an asset.

Retained earnings is the accumulated profit after tax less dividends. Opening balance, plus profit for the year, less dividends declared in the year, gives the closing balance.

Dividends: an ordinary dividend is a liability only once it is declared (properly authorised) on or before the reporting date. A dividend proposed after the year end is a non-adjusting event under IAS 10. It is not a liability at the year end. It is disclosed in the notes only. Dividends paid in the year are shown in the statement of changes in equity. The notes and the statement of changes in equity must agree with each other and with the statement of financial position.

Key formulas to remember

Closing retained earnings: Opening retained earnings + profit for the year − dividends declared in the year = closing retained earnings; Use dividends declared by the reporting date, not those proposed afterwards.
Share capital on a share issue: Number of shares × nominal value = credit to share capital; The rest of the cash received is credited to share premium.
Share premium on a share issue: Number of shares × (issue price − nominal value) = credit to share premium; Issue costs are normally deducted from share premium (or equity), not expensed.
Revaluation surplus movement: Opening surplus + revaluation gain (via OCI) − transfers = closing surplus; A gain goes to OCI. A revaluation loss first reduces any existing surplus on that same asset.
Dividend rule (IAS 10): Declared on or before year end = liability; declared after year end = disclosure only; Applies to equity dividends. Dividends on irredeemable preference shares are usually finance costs.

How to solve Share Capital, Reserves and Dividends Notes questions

Use this method for any question on equity notes, whether it asks for a figure or asks which statement about a note is correct.

1Read what is asked: a closing balance, a movement, or a disclosure rule.
2List each component of equity: share capital, share premium, revaluation surplus, retained earnings.
3For any share issue, split the proceeds into nominal value (share capital) and the excess (share premium).
4Put revaluation gains in revaluation surplus via OCI, never in profit or loss.
5Roll forward retained earnings: opening balance, add profit, deduct dividends declared in the year.
6Check dates for dividends. If declared after the year end, do not deduct it. Disclose it only.
7Add up the components and agree the total to equity in the statement of financial position.
8Choose the answer that matches your figures, and check no option is a trap using the same number in the wrong reserve.

Quickest way: Reserve-by-reserve roll-forward

When to use it: Use for number entry or multiple choice questions that give opening balances and a few year events.

Write the four headings: share capital, share premium, revaluation surplus, retained earnings.
Put the opening balance under each heading.
Post each event to one heading only: shares issued (par and premium), gain on revaluation, profit, dividend.
Ignore any dividend proposed after the year end.
Add each column and give the one asked for.

Common mistakes in Share Capital, Reserves and Dividends Notes

Putting the whole issue proceeds into share capital.
Students forget that share capital is held at nominal value.
Fix: Always compute nominal value × shares first. The excess goes to share premium.
Treating a revaluation gain as profit.
A gain feels like income, so it gets credited to profit or loss.
Fix: Credit it to other comprehensive income and revaluation surplus.
Deducting a proposed final dividend from retained earnings at the year end.
Students think proposed means committed.
Fix: If it was not declared by the reporting date, there is no liability. Disclose it in the notes only (IAS 10).
Confusing share premium with revaluation surplus.
Both are non-profit reserves in equity.
Fix: Share premium comes from cash paid by shareholders above par. Revaluation surplus comes from an unrealised asset gain.
Showing dividends paid in the statement of profit or loss.
Dividends are linked to profit in the mind.
Fix: Equity dividends are a distribution of profit. They appear in the statement of changes in equity, not as an expense.
Not agreeing the note total to the statement of financial position.
Time pressure, so no final check.
Fix: Add all components and check against total equity. A mismatch shows an omitted item.

Worked examples

Example 1

At 1 January a company had 2,00,000 ordinary shares of $1 each, share premium of $50,000 and retained earnings of $3,00,000. During the year it issued 1,00,000 new shares at $1.60 each for cash. Profit for the year was $1,20,000. An interim dividend of $20,000 was declared and paid in the year. What are the closing balances of share capital, share premium and retained earnings?

Show the solution

Share capital: 2,00,000 + 1,00,000 = 3,00,000 shares × $1 = $3,00,000.
Premium per share on the new issue = $1.60 − $1.00 = $0.60.
New share premium = 1,00,000 × $0.60 = $60,000.
Closing share premium = $50,000 + $60,000 = $1,10,000.
Closing retained earnings = $3,00,000 + $1,20,000 − $20,000 = $4,00,000.

Answer: Share capital $3,00,000; share premium $1,10,000; retained earnings $4,00,000.

Example 2

A company's year end is 31 December. Retained earnings at 1 January were $5,00,000 and profit for the year was $2,00,000. A dividend of $30,000 was declared and paid in November. After the year end, on 20 January, the directors proposed a further dividend of $50,000. Which retained earnings figure appears at 31 December and how is the $50,000 treated?

Show the solution

Dividends deducted are those declared by the year end: $30,000.
Closing retained earnings = $5,00,000 + $2,00,000 − $30,000 = $6,70,000.
The $50,000 dividend arose after the reporting date, so no liability existed at 31 December.
Under IAS 10 this is a non-adjusting event. It is not deducted from retained earnings.
It is disclosed in the notes as a proposed dividend.

Answer: Retained earnings are $6,70,000. The $50,000 is disclosed in the notes only and not recognised as a liability.

Exam tips

Objective tests love the share premium calculation. Do the nominal value split first, every time.
Check the dividend date before using it. Declared after the year end means no deduction.
Remember which reserve each item belongs to: cash above par is share premium, asset gains are revaluation surplus.
For multiple response questions, select exactly the number stated and test each option against the rule.
Use the final check: total equity from your note should equal equity in the statement of financial position.

Practice questions from Disclosure notes

Share Capital, Reserves and Dividends Notes in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Share Capital, Reserves and Dividends Notes: frequently asked questions

What is the difference between share premium and revaluation surplus?

Share premium is the amount shareholders pay above nominal value when shares are issued. Revaluation surplus is an unrealised gain from revaluing a non-current asset above its carrying amount. Premium comes from cash received. The surplus comes from an accounting gain recorded through OCI.

Are proposed dividends shown as a liability?

Not if they are proposed after the reporting date. Under IAS 10 there is no obligation at the year end, so you disclose them in the notes. A dividend declared on or before the year end is a liability.

What does the share capital note show?

It shows each class of shares, the number issued and the nominal value, and the amount in share capital. Amounts above nominal value are not included. They are shown in share premium.

How are the statement of changes in equity and the notes different?

The statement of changes in equity shows the movements in all components of equity over the year in one place. The notes give detail behind the individual balances, such as classes of shares and the nature of each reserve. Both must agree with the statement of financial position.