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  Financing Limited Companies

Introduction to Financing Limited Companies

Equity (the owners' claim)

The equity of a sole proprietorship is generally included in one figure on the statement of financial position. This is generally a little more complicated with companies even though in essence similar broad principles apply. With a company, equity is divided among shares (for instance, the original investment), on the one hand, and on the other (i.e. profits and gains consequently made). There is also the probability that there will be more than one type of shares and of reserves. So, in the basic divisions of share capital and reserves, there might well be additional subdivisions. This might seem relatively complicated, but we shall shortly refer the reasons for these subdivisions and all should become clearer.

The basic division

While a company is first created, those who take steps to form it (the promoters) will decide how much requirements to be raised through the potential shareholders to set the company up with the essential assets to operate.

The profit that is shown in a reserve termed as a revenue reserve, because it takes place from generating revenue (making sales).

Note: we do not just merge the profit with the share capital: we must keep the two amounts separate (to suit company law). The reason for this is that there is a legal limitation on the maximum drawings of their equity (or payment of a dividend) that the shareholders can make. This is described by the amount of revenue reserves and so it is useful to show these separately.

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