The equity section of the nominal ledger records what the company owes its owners as owners, rather than as lenders. For a limited company it is governed by company law, which is why it has more structure than a sole trader’s single capital account: the law cares about the difference between money shareholders put in and profit the company earned, because only the second can be paid out as dividends.
The accounts in the capital and reserves section
| Account | What it holds | Changes when |
|---|---|---|
| Called up share capital | The nominal value of shares issued, by class | Shares are allotted, bought back or cancelled |
| Share premium | Amounts received above nominal value | Shares are issued above nominal value |
| Unpaid share capital | Share capital issued but not yet paid for (an asset, not equity) | Shares are allotted unpaid, then paid up |
| Profit and loss reserve | Accumulated profits less losses and dividends | Year-end close, dividends, prior-period adjustments |
| Other reserves | Revaluation reserve, capital redemption reserve and similar | Specific events only |
Keep one share capital account per class of share (ordinary, A ordinary, preference) if the company has more than one class. The detail on the profit and loss reserve is on retained earnings.
Formation shares
Most small companies are formed with a handful of £1 ordinary shares, often 100. The subscribers agree to pay £100, but the money frequently never reaches the bank. That is not a bookkeeping problem to be hidden; the shares are issued and the subscribers owe the company for them:
| Account | Debit | Credit |
|---|---|---|
| Unpaid share capital | £100 | |
| Called up share capital – ordinary | £100 |
When the director pays the £100, credit unpaid share capital and debit the bank. Until then, the debit balance appears on the balance sheet, normally as called up share capital not paid.
Posting a later allotment
A company issues 200 new £1 ordinary shares to an investor at £25 a share. The investor pays £5,000. Only the nominal value goes to share capital; the rest is premium:
| Account | Debit | Credit |
|---|---|---|
| Bank | £5,000 | |
| Called up share capital – ordinary | £200 | |
| Share premium | £4,800 |
Crediting the whole £5,000 to share capital is the most common equity error in small company ledgers. It overstates share capital, which then no longer matches the statement of capital at Companies House, and it understates share premium, which has its own legal restrictions.
Share premium can be used only for limited purposes set out in the Companies Act 2006, including paying up bonus shares and writing off the expenses of issuing the shares that created it. It cannot fund a dividend. Legal and other costs of the issue are covered in share premium account, and the premium account itself in share premium.
The paperwork that has to match the ledger
Before allotting, confirm the directors have authority to allot shares and whether existing shareholders have pre-emption rights; your articles and any shareholders’ agreement may add conditions. After allotting:
- File a return of allotment (form SH01) with Companies House within one month of the allotment, under section 555 of the Companies Act 2006. It includes an updated statement of capital.
- Enter the new shareholder and shares in the register of members, one of the statutory registers the company must keep.
- Issue a share certificate.
- Check the people with significant control register if the allotment changes who holds more than 25%.
At the year end, tie the share capital account to the latest statement of capital, share class by share class. If they differ, either a filing was missed or the ledger is wrong. More background on classes, rights and nominal value is in share capital.
Money in that is not share capital
Directors often transfer money to a new company and call it “investment”. Unless shares were allotted for it, it is a loan from the director and goes to the director’s loan account, not to equity. The same applies to a shareholder paying a supplier on the company’s behalf. Equity should move only when the company’s legal share capital or reserves change.
A capital contribution, where a shareholder gives money with no shares issued and no loan created, is possible but uncommon in small companies. It needs a clear written record and usually your accountant’s advice.
How a sole trader’s equity differs
A sole trader has no shares and no separate legal person. The equity section is a single capital account, often with sub-accounts:
- capital introduced, for money the owner puts in
- profit for the year, transferred at the year end
- drawings, for money the owner takes out
The closing balance is simply opening capital plus money in plus profit, less drawings. There is no share premium, no distributable profit test and no Companies House filing. The owner can take money out whenever they like; drawings are neither taxed nor deductible, because the owner pays income tax on the profit itself. Day-to-day handling is covered in owner contributions and drawings.
In the published balance sheet
Under the Companies Act formats, capital and reserves shows called up share capital, the share premium account, revaluation reserve, other reserves and the profit and loss account as separate lines, with a total that equals net assets. Unpaid share capital is shown as an asset, not deducted inside equity. Micro-entity accounts give less detail on the face of the balance sheet, but the ledger needs the full split either way.