The following is a highly abbreviated balance sheet of a business that has been trading for some period of time and which has retained at least some of its profits

It is open to the business, with only the minimum of administrative difficulty, to convert all or part of the £3m retained profits to shares, which may be issued pro rata to the ordinary shareholders. Let us assume for our example that £2m of the £3m retained profits is so converted.
The revised balance sheet would be:

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Balance sheet as at 30 June 2006 Sources of finance (claims) m Ordinary shares of 1 each Retained profits Equity Long-term loan 4372|0|| Uses of finance (investments) m Non-current assets 5 Working capital 4 g