Definition. Reserves are the part of a company's equity that is not share capital. They build up from profits kept in the business and from certain capital transactions, such as issuing shares above their nominal value.
Where it sits in the accounts. Reserves appear under “Capital and reserves” at the bottom of a UK balance sheet, next to called up share capital. They are not an asset and not cash: they show how the company’s net assets have been funded.
Northbank Software Ltd makes £200,000 profit after tax in its first year and pays £50,000 in dividends. Its profit and loss reserve at the year end is £150,000. If it also issued 1,000 £1 shares for £10 each, £9,000 sits in the share premium account.
No. Reserves are part of equity on the balance sheet. The money they represent may be held as cash, stock, equipment or other assets.
Revenue reserves come from trading profits and can usually fund dividends. Capital reserves, such as share premium, generally cannot be paid out as dividends.
Only from distributable reserves, which are mainly accumulated realised profits, under the Companies Act 2006.
Related terms: Share premium · Called up share capital · Net assets · Retained earnings