Question

What is Capital Reserve?

Hint:

Capital reserves are typically used for strengthening the capital base of a company, such as issuing bonus shares or writing off capital losses.

Answer 1

Step 1: Understanding Capital Reserve.
Capital Reserve is a reserve created out of capital profits, which are not available for distribution as dividends. These profits typically arise from non-operating activities such as the sale of fixed assets, revaluation of assets, or the premium received on issuing shares or debentures. Capital reserves are typically used for purposes such as issuing bonus shares, writing off capital losses, or increasing the capital of the company. They are not used for regular business expenses or dividends.
Step 2: Characteristics of Capital Reserve.
- Capital reserve is created from non-operating profits. - It is a part of the owner’s equity, but it is restricted in its use. - It cannot be distributed as dividends or used for regular business operations.
Step 3: Conclusion.
Capital reserves are created from the capital profits of a company and are restricted for certain uses, usually involving the long-term financial stability or future growth of the company.