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Friday 4 September 2009

Theories & Further Information about Shareholder's Equity

The shareholder's equity is often an important part of the capital that funds the net assets.


The share capital may be made up of both ordinary and preference shares, though preference shares are much less popular these days for tax reasons. However, in the notes to the accounts there may also be a figure for Authorised Share Capital. This may be very different to the Issued Share Capital. The authorised capital is the maximum amount of money that the shareholders have decided that the company can issue in shares and will usually be considerably larger than the issues share capital as the company wants to retain the option of issuing more shares in the future to raise more capital - perhaps to fund an expansion.

The reserves will include retained profit from the past. That is profits that the firm has kept for itself and not issued to shareholders in the form of a dividend. They may also include share premiums. As mentioned in the explanation of shareholder's equity, this is where shares are issued at more than their face value. The face value of the share may be, say £1, but they may be issued at £3.50 because the market has risen in the meantime and the shares are now worth much more. The £1 will be included as part of the issued share capital (see above), but the other £2.50 will be called a share premium. A final part of reserves may be something called revaluations. If the company's assets have risen in value - perhaps because of inflation - this is effectively a source of funds for the shareholders and so also needs to be recorded on the bottom half of the balance sheet. This situation can occur particularly with property companies such as hotel operators where the value of the properties rises with a booming property market.

The shareholder's equity is shown on the balance sheet as part of the balancing figure - the one that matches the net assets. It is therefore a key part of the capital financing of the business.

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