What is Capital Reserve? and its utilization?

Capital Reserve is the reserve which is created out of capital profit. It is not ordinarily distributed as dividend to shareholders. The concept is if we generate profit from an extra-ordinary transaction we kept it as capital reserve to safeguard against any capital losses if arise in future.

The following are some examples of capital profits which should be credited to capital reserve:

1.    Profit on repayment of debentures. That is, redeem the debentures at discount.

2.    Profit on revaluation of assets.

3.    Profit earned through forfeiture and re-issue of shares. For detail knowledge of forfeiture please click here

4.    Profit earned prior to incorporation, and

5.    Profit on the acquisition of business etc.

Utilization of Capital Reserves: (The intention is to reduce capital losses)

a)    For issuing bonus shares.

b)    In writing off preliminary expenses.

c)    In writing off commission or expense or discounts etc on shares or debentures.

d)    For providing premium on the redemption of redeemable preference shares or debentures.

This was the short description of capital Reserve. If you have any questions, feel free to write me in the comment box below.