Capital reserve is created by capital profits of the company which is not kept for distribution to the shareholders in the form of dividend. Common example may the the goodwill which is created prior to the incorporation of the entity. This is included in the retained earning statements.
How Capital Reserve is Created?
- It may be created from the following sources:
- profit gained priot tot he registration or incorporation of the entity,
- profit earned on the issue of debentures or shares,
- any balance found in the capital reduction account,
- any balance found in the general reserve account which is then transferred to the redemption fund account,
- any other income which cannot be divided to the existing shsareholders as dividend.