What is Capital Reserve?

Capital Reserve is a reserve that is created out of the capital surplus of the organization. These reserves do not emerge out of the profit earned from ordinary business activities and cannot be used for dividend distribution. These reserves are created for specific purposes and can be used for that reason only. Rather, Capital Reserves are used to write off the capital losses of the companies. Capital Reserve is shown on the Liability side of the Balance Sheet under the head ‘Reserve and Surplus’. Capital Reserves are created out of the following items:

• Profit on sale and revaluation of Fixed assets
• Premium on issue of shares and debentures
• Profit on forfeiture and re-issue of shares
• Profit on redemption of Debentures

In common terms, a Reserve is anything retained for the future. Similarly, in Accountancy, Reserve means a part of the profit that has been retained and kept aside by the companies to meet their future needs. Reserves strengthen the financial position of the companies and make them more competitive. Capital Reserve and Revenue Reserve are the two types of reserves kept by a company to face its contingencies in the future. The Capital and Revenue Reserve is one of the most special appropriations of a company’s profits. The reserves of a company are prepared for multiple purposes. Some of these include:

• Expansion and Diversification of the Company
• Payment of the liability
• Purchasing the fixed assets
• Redemption of Debentures
• Payment of Dividend
• Writing off the losses