Question

Capital Reserves are created from Capital Profits.

Hint:

Capital Reserve comes only from capital profits, not trading income.

Answer 1

Capital reserves arise from capital profits such as premium on issue of shares, profit on forfeiture of shares, profit prior to incorporation, and gains on revaluation. These profits come from non-operational activities and therefore cannot be distributed as dividends. Instead, they are transferred to the Capital Reserve for strengthening financial stability or issuing bonus shares. Revenue profits, on the other hand, go to the Profit and Loss Account. Hence, the statement is true because capital reserves are indeed created from capital profits.