Q.What is 'Capital Reserve'?

Capital Reserve is a specific category of reserve that is not created out of the normal operating profits of a business. It arises from capital profits — gains that are not earned through the company's regular trading activities.

The key characteristic of a capital reserve is that it is not available for distribution as dividends to shareholders. It is typically used to write off capital losses or to issue bonus shares.

Common sources of Capital Reserve include:

• Profit on sale of a fixed asset (e.g., land or building)
• Profit on reissue of forfeited shares
• Premium on issue of shares or debentures (transferred to Securities Premium Reserve, which is a capital reserve)
• Profit on redemption of debentures
• Profit prior to incorporation

Comparison with General Reserve:

| Feature | Capital Reserve | General Reserve |

| :--- | :--- | :--- | …

Understanding Capital Reserve

Capital Reserve is a specific type of reserve that arises from capital profits — gains that are not earned through the company's regular trading activities. The key idea is that these are non-operating, non-recurring gains that increase the company's net worth but cannot be distributed as dividends to shareholders.

The accounting treatment follows a simple rule: credit the Capital Reserve account when such a gain is realised, and debit it when it is utilised (e.g., for writing off capital losses or issuing bonus shares).

Common Sources of Capital Reserve

1. Profit on sale of fixed assets (sold above book value)
2. Profit on reissue of forfeited shares
3. Profit on redemption of debentures
4. Profit prior to incorporation (earned before the company was legally formed)
5. Premium on issue of shares or debentures (though this is often kept in a separate 'Securities Premium Reserve')
6. Profit on sale of a business or undertaking

Why It Cannot Be Distributed

The logic is straightforward: these profits are not from the company's core business operations. Distributing them as dividends would erode the capital base of the company, which is meant to be preserved for creditors and long-term stability. For example, if a company sells a factory building at a profit, that gain is a one-time windfall — not repeatable income like sales revenue.

Accounting Entry (General Format)

When a capital profit arises:

Presentation in Financial Statements

In the Balance Sheet, Capital Reserve appears under:

Equity and Liabilities

• Shareholders' Funds
  • Reserves and Surplus
    • Capital Reserve
    • Securities Premium Reserve
    • General Reserve
    • etc.