Company Capitalisation

Company Capitalisation

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Scenario

A company has a called up share capital of £1 and has made a loss in the first year of trading of £1,001.

Share Capital             ( 1)

Reserves               1,001

Equity                   1,000

What implications would this have?

Replies (4)

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By Ben Smith
31st Jan 2013 10:24

Erm...

That the company is loss making and therefore no dividends are payable.

Not really sure of the point of the question...

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By andy4151
31st Jan 2013 10:36

Thanks
I understand dividends could not be paid. Would the shareholders be required to make further investment so the share capital would be greater than the loss.

For example

The shareholders purchased more shares so the equity is now

Capital. (2001)

Reserves. 1001

Equity. (1000)

I suppose my question is. Does equity always have to be a credit or is it ok for it to be a debit while the company is loss making?

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By Ben Smith
31st Jan 2013 12:44

If it is a loss making business, it is a loss making business.

In the short term, businesses do not go out of business due to making financial losses - they go out of business because they run out of cash.

There may be going concern issues though...

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By andy4151
31st Jan 2013 12:55

Thanks Ben
So shareholders would not be required to input more capital if the reserves are a debit balance.

Thank you for your help

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