Capital Surplus and Reserves on the Monthly Statement

Example of Capital Surplus

Let’s assume that the nominal value of the stock of Acme Corp is $1 per share. The company sells 10,000 shares of stock at a price of $10 per share. The nominal value of the stock is $10,000, but total revenues amount to $100,000. The capital surplus is $90,000.

What are Reserves on the Monthly Statement?

The term “reserves on the monthly statement” refers to the equity section of the monthly statement. (Excluding the basic part of common stock capital.) It may be tempting to ignore the reserves area without giving it much thought. This can be a mistake depending on the sector or industry of the business.

In fact, reserves deserve special attention when analyzing the company. The following briefly describes some examples of reserves you may encounter and will give you an idea of their purpose in the monthly statement.

Reserves on the monthly statement may include these items:

• Capital reserves: typically arise from stocks that exceed the nominal value.
• Retained earnings: arise from previous profits. Simply put, they are net earnings that have not been paid to shareholders as dividends.
• Fair value reserves: may include adjustments for securities available for sale and assets. Fair value reserves are important for companies like insurance companies that have significant investments in fixed-income securities.
• Hedge reserves: may arise as a result of hedges the company has made to protect itself against fluctuations in certain input costs.
• Asset revaluation reserves: arise when a company has to adjust the value of an asset held on the asset side of the monthly statement.
• Foreign currency translation reserves: arise from changes in the relative value of the currency in which the monthly statement is reported and the currency in which the assets are held in the monthly statement.
• Legal reserves: these are reserves that the company must create by law and cannot be paid out as dividends.

Another Meaning of the Term “Reserves”

When you hear investors, accountants, or analysts talking about reserves, they may not be referring to the reserves outlined in the equity section of the monthly statement. Instead, some types of accounting transactions require reserves to keep the income statement as close to reality as possible.

For example, reserves may be important in this situation: the company has a large amount of current assets in accounts receivable. The company settles part of the total amount it believes will not be paid. Perhaps the decision is based on prior experience. Or maybe they base their choice on reviewing current balances.

This accounting transaction reduces current assets. It is known as “allowance” or “reserve” for bad accounts. It is a contra asset account and offsets accounts receivable. If it turns out that management was too pessimistic, reserves can be reversed. In this case, profitability would appear high.

Frequently Asked Questions (FAQs)

What is the difference between capital reserves and reserve capital?

Capital reserves are capital gains that are earmarked for expected expenses or long-term projects. They are funds that have a purpose when taken from capital gains. Reserve capital is the company’s emergency fund and is not required to be on the monthly statement. Those funds are allocated without a direct purpose, aside from extra funds if the company needs them.

What is an example of capital reserve?

The surplus after revaluing liabilities and assets, cash from asset sales, and premiums from stocks and bonds are some examples of capital reserves.

Source: https://www.thebalancemoney.com/capital-surplus-and-reserves-on-the-balance-sheet-357270