Classify limited-company capital and reserves
Separate equity share capital and reserves from loan capital, and interpret issued, called-up and paid-up amounts.
Cambridge IGCSE Accounting 0452 / (9–1) 0985, 2027–2029 Version 1. These lessons follow the 2027–2029 syllabus only; the separate 2026 syllabus update is not yet mapped. Written practice is self-checked, not an official Cambridge grade. Full timed-paper practice and human subject-teacher review remain pending.
Before you begin
- No previous accounting study is assumed. Keep the business, transaction and accounting period in view, and distinguish a resource, a claim and a performance result.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
The company has asked shareholders to pay a portion of issued shares. What is that amount called?
What you will learn
- Explain limited liability and equity ownership
- Describe advantages and disadvantages of operating as a limited company
- Classify share capital, reserves and loan capital and distinguish issued, called-up and paid-up amounts
Separate ownership from borrowing
A limited company may be a trading, service or manufacturing business, or combine these activities. It is a separate legal entity and shareholders' liability is limited to the amount unpaid on their shares, subject to the company's terms and applicable law. Equity is the owners' residual interest after liabilities; ordinary share capital represents ownership, and ordinary shareholders may have voting rights and a variable return.
Limited liability and access to share finance can be advantages; reporting duties, costs and shared control can be disadvantages. Consider the circumstances rather than treating one business form as best for every owner.
Preference shares have specified priority for dividends or repayment according to their terms. Loan capital, such as debentures, is borrowing and a liability, not share capital; its interest is a finance expense.
Read the share and reserve labels precisely
Issued share capital is the nominal value of shares issued. Called-up capital is the amount the company has requested shareholders to pay; paid-up capital is the amount received. Called-up but unpaid amounts remain outstanding.
A general reserve is an appropriation within equity. Retained earnings are accumulated profits less distributions and transfers. Do not classify reserves as external liabilities or treat loan capital as a reserve.
Pause and explain
A company calls up $60,000 on its shares and has received $57,500. How much called-up capital remains unpaid?
Worked example
A company issued 50,000 ordinary shares of $1 each, called up $0.80 per share and received $38,000. It also has preference share capital $20,000, general reserve $5,000, retained earnings $12,000 and a 5-year debenture $10,000. Classify and calculate called-up and unpaid share capital.
Show the worked solution
- Issued ordinary share capital = 50,000 × $1 = $50,000; called-up = 50,000 × $0.80 = $40,000.
- Called-up but unpaid ordinary capital = 40,000 − 38,000 = $2,000.
- Preference shares, general reserve and retained earnings are equity components under their terms; the debenture is a non-current liability.
Answer Issued ordinary share capital $50,000; called-up $40,000; paid-up $38,000; called-up unpaid $2,000. The debenture is a liability; reserves and share capital are equity.
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Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
A company has 80,000 ordinary $1 shares issued, $0.75 called up and $58,000 paid. Calculate issued, called-up and unpaid called-up capital.
Give me a hint
Multiply shares by nominal value or the amount called, then compare called-up with cash received.
Compare my reasoning
- Issued capital = 80,000 × $1 = $80,000.
- Called-up capital = 80,000 × $0.75 = $60,000.
- Unpaid called-up capital = 60,000 − 58,000 = $2,000.
Issued $80,000; called-up $60,000; unpaid called-up $2,000; paid-up amount $58,000.
Look for these in your work
- Issued amount correct
- Called-up amount correct
- Unpaid amount correct
Classify ordinary share capital $45,000, preference share capital $15,000, retained earnings $7,400, general reserve $2,600 and debentures $20,000.
Give me a hint
Separate owners' equity components from a borrowing obligation.
Compare my reasoning
- Share capital = 45,000 + 15,000 = $60,000.
- Reserves = 7,400 + 2,600 = $10,000; total equity is $70,000.
- Debentures of $20,000 are loan capital and a liability.
Equity $70,000 (share capital $60,000 and reserves $10,000); debentures $20,000 liability.
Look for these in your work
- Share capital classified
- Reserves classified
- Loan liability distinguished
Explain one difference between ordinary shares, preference shares and loan capital, using the terms ownership, return and repayment.
Give me a hint
Compare the holder's relationship with the company, not just the label.
Compare my reasoning
- Ordinary shareholders are owners with a residual return and may have voting rights under the terms.
- Preference shareholders have specified priority for returns according to their share terms.
- Loan-capital holders are creditors entitled to interest and repayment under the loan agreement, not owners by virtue of the loan.
Ordinary shares represent ownership with a variable residual return; preference shares have priority defined by their terms; loan capital is debt with interest and repayment terms, not ownership.
Look for these in your work
- Ownership distinguished
- Preference terms qualified
- Debt distinguished
Common mistakes
- Classifying debentures as share capital
- Calling a reserve a liability
- Confusing shares issued with amounts called up or paid
- Assuming a preference dividend is guaranteed regardless of the share terms
What can you explain now?
Is debenture loan capital equity or a liability?
Compare with the explanation
A liability
The company borrows the amount and must meet its loan terms.
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Make it stick
Why is loan capital presented separately from a company's share capital and reserves?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.