The reserve which is formed out of the capital earnings is known as capital reserve. It is formed out of the earnings of several particular transactions of capital nature. It is not obtainable for the distribution to shareholders as a dividend. It is used to assemble capital loss. The capital reserve is shown on the liabilities side of the balance sheet. Sometimes, it can be used to issue fully-paid bonus shares. It also alludes to a fund that is created to finance long-term plan or write off capital expenses. It is not obtainable for allocation as a dividend.
Items of capital profit out of which capital reserve is created:
- Profit on revaluation of assets and liabilities.
- Profit on sale of assets
- Profit on sale of shares and debentures
- Profit on forfeiture of shares
- Profit on redemption of debentures
- Profit on purchasing running business