Financial Accounting · Statement of financial position

Equity in the Statement of Financial Position: Share Capital and Reserves

Updated 11 October 2026 · Fact-checked

Equity is the owners' residual claim: share capital plus reserves. Share capital is nominal value of shares issued. Reserves include share premium, revaluation surplus and retained earnings. To solve questions, split each issue into nominal value and premium, post the debit and credit, then rebuild each equity balance and total them.

Understand Equity: Share Capital and Reserves

Equity is what is left when you deduct liabilities from assets. In a company it is shown in the statement of financial position as share capital and reserves. It belongs to the shareholders.

Share capital is recorded at nominal (par) value, for example $1 per share. Ordinary shares carry the residual risk and receive dividends only if declared. Preference shares usually have a fixed dividend and rank ahead of ordinary shares. Irredeemable preference shares are equity. Redeemable preference shares are normally a liability under IAS 32, and their dividends are finance costs.

If a company sells shares for more than nominal value, the excess goes to share premium. This is a non-distributable reserve. Never credit it to profit or loss. Issue costs are normally deducted from share premium.

Retained earnings are accumulated profits less dividends paid. Revaluation surplus arises when a non-current asset is revalued upwards. The gain goes to other comprehensive income, then to the revaluation surplus. It is not profit and is not normally distributable.

A bonus issue turns reserves into share capital. It brings no cash in. A rights issue offers shares to existing shareholders, usually at a discount to market price, and brings cash in. Rights issues at above nominal value create share premium.

Key formulas to remember

Equity: Equity = Share capital + Share premium + Revaluation surplus + Retained earnings; Also equals total assets − total liabilities.
Share issue entry: Dr Bank (shares × issue price); Cr Share capital (shares × nominal value); Cr Share premium (shares × (issue price − nominal value)); Premium is the difference between issue price and nominal value.
Bonus issue entry: Dr Share premium or retained earnings; Cr Share capital (bonus shares × nominal value); No cash. Total equity is unchanged. Use share premium first if told to.
Rights issue entry: Dr Bank (new shares × rights price); Cr Share capital (nominal value); Cr Share premium (balance); Treat like a normal share issue, at the rights price.
Revaluation gain: Gain = revalued amount − carrying amount; Dr Asset; Cr Profit or loss (only the part that reverses an earlier revaluation loss on the same asset that was charged to profit or loss); Cr Revaluation surplus (the rest, via other comprehensive income); The part of the gain that reverses an earlier loss on the same asset, previously charged to profit or loss, is credited to profit or loss. Any excess is shown in other comprehensive income and credited to revaluation surplus.
Retained earnings closing: Closing = Opening + Profit for the year − Dividends declared in the year (deducted when declared, not when paid); Dividends are deducted in the period they are declared. A dividend declared before year end but still unpaid is also deducted.

How to solve Equity: Share Capital and Reserves questions

Use this order for any equity question, whether it asks for one balance or the whole equity section.

1List the opening balances of share capital, share premium, revaluation surplus and retained earnings.
2Read each event and decide which equity account it affects: new issue, bonus, rights, revaluation, profit or dividend.
3For each share issue, work out number of shares × nominal value for share capital, and the rest of the proceeds for premium.
4For a bonus issue, debit the reserve you are told to use and credit share capital. Check that no cash moves.
5For a revaluation, compare revalued amount with carrying amount and credit the gain to the revaluation surplus.
6Add profit for the year to retained earnings and deduct dividends.
7Total each account to get closing balances, then total equity.
8Cross-check: total equity should equal net assets if the question gives them.

Quickest way: Account-by-account columns

When to use it: Use this for number entry or multiple choice questions that ask for one closing balance.

Write the four headings: capital, premium, revaluation, retained earnings.
Put the opening figure under each heading.
Apply each event as a plus or minus under the right heading only.
Check the bonus issue moves between columns and the total does not change.
Add the column you were asked for and read the question once more to confirm the unit and the rounding.

Common mistakes in Equity: Share Capital and Reserves

Crediting the whole proceeds of a share issue to share capital.
You forget that share capital is only at nominal value.
Fix: Always split the proceeds into nominal value and premium before posting.
Treating a bonus issue as bringing in cash.
You mix it up with a rights issue.
Fix: A bonus issue is a transfer between equity accounts. No bank entry, and total equity is unchanged.
Taking a revaluation gain to profit or loss.
Gains on assets feel like profit.
Fix: Take the gain to other comprehensive income and credit the revaluation surplus.
Showing redeemable preference shares in equity.
The word 'share' suggests equity.
Fix: Redeemable preference shares are a liability under IAS 32. Their dividends are finance costs, not deducted from retained earnings.
Using the market price instead of the rights price for a rights issue.
Questions often give both prices.
Fix: Cash received is shares issued × the rights price. Market price is not used in the entries.
Deducting a proposed dividend that was declared after the year end.
You see 'dividend' and subtract it.
Fix: Deduct dividends declared by the reporting date, whether or not they have been paid. A dividend declared after the year end is a non-adjusting event.

Worked examples

Example 1

A company has equity of: share capital 300,000 shares of $1 = $300,000; share premium $60,000; revaluation surplus $25,000; retained earnings $140,000. It makes a 1 for 3 bonus issue using share premium first, then retained earnings for the rest. Land with carrying amount $100,000 is revalued to $130,000. Profit for the year of $45,000 is not yet added to retained earnings. Dividends of $15,000 were paid during the year. The dividend has not yet been deducted from the opening retained earnings of $140,000. Calculate each closing equity balance.

Show the solution

Bonus shares = 300,000 ÷ 3 = 100,000, a nominal value of $100,000.
Use share premium of $60,000 first. The remaining $40,000 comes from retained earnings.
Share capital = $300,000 + $100,000 = $400,000.
Share premium = $60,000 − $60,000 = $0.
Revaluation gain = $130,000 − $100,000 = $30,000, so revaluation surplus = $25,000 + $30,000 = $55,000.
Retained earnings = $140,000 opening − $40,000 bonus issue + $45,000 profit − $15,000 dividend (not yet deducted) = $130,000.
Total equity = $400,000 + $0 + $55,000 + $130,000 = $585,000.

Answer: Share capital $400,000; share premium $0; revaluation surplus $55,000; retained earnings $130,000; total equity $585,000.

Exam tips

Read whether the question gives you the issue price or the premium. The two are easy to swap.
In bonus issue questions, check which reserve the question tells you to use. If none is stated, retained earnings is often the one used, but follow the wording.
For multiple response questions, tick only the stated number of options. Statements that a bonus issue raises cash are always false.
In number entry questions, enter the figure only, with no symbols, and check whether the answer wants a closing balance or the movement.
Check whether preference shares are redeemable before placing them in equity or liabilities.

Practice questions from Statement of financial position

Equity: Share Capital and Reserves in other exams

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

Equity: Share Capital and Reserves: frequently asked questions

What is the difference between a bonus issue and a rights issue?

A bonus issue gives existing shareholders free shares from reserves, so no cash is received. A rights issue offers new shares for cash to existing shareholders, usually at a discount to market price. Of the two, only the rights issue brings in cash and increases equity through the issue itself. A bonus issue leaves total equity unchanged.

What is share premium and can it be paid as a dividend?

Share premium is the amount received above nominal value when shares are issued. It is a non-distributable reserve, so it cannot normally be paid out as a dividend. It can be used for a bonus issue and, in some cases, to write off issue costs.

How do I record a revaluation surplus?

Debit the asset with the increase in value and credit the revaluation surplus through other comprehensive income. It then appears under reserves in the statement of financial position. It is not part of profit for the year.

Where do ordinary and preference shares appear in the statement of financial position?

Ordinary shares are shown in equity at nominal value. Irredeemable preference shares are also equity. Redeemable preference shares are normally shown as a non-current liability.