Capital reserve is a reserve created by a company with a view to face contingencies like inflation, instability etc. in times of rising price. Normally, capital reserves are the reserves raised through non-trading activities and relates to company. For example, to boost investors’ confidence during inflation time, the book value of the company can be increased using revaluation of assets reserve. In the same way, the company can allocate certain portion of their profit for capital redemption reserves for purchasing their own company shares when the share market is in downtrend thus keeping the value of the share in check protecting the shareholders interest which is called buy back of shares. Also any profit on purchase of business, forfeiture of shares, gain on reissue of forfeited shares and debenture premium may be put under capital reserves under different heads. These capital reserves can be used to write off fictitious assets subject to certain conditions.
Normally Capital reserve cannot be used for distribution of dividend.
It is the capital which is not yet called up. Against the authorized capital of any company, certain calls will be due for subscriptions when called. The company can call for subscriptions as and when it needs. This type of capital in reserve is called reserve capital and it is entirely different from capital reserve.
These are the reserves created out of profit from trading activities. e.g. retained earnings and profit loss account under liabilities side etc. This can be distributed as dividend and also as bonus shares normally.
C.R. Venkata Ramani