What are Capital Reserves?

A capital reserve refers to a specific fund or amount set aside to cater for future or unpredictable expenses or losses of a company. It is an account on a company's balance sheet put aside to settle financial emergencies or capital losses that the company might face. A capital reserve is set aside for unpredictable expenses or long-term investment projects of a company. A capital reserve is not useful when a company needs to pay dividends, they are permanently separated from other accounts, usually through investment. An accumulated capital surplus such as profit and appreciation of the current market value of a company's asset make up a capital reserve.

How are Capital Reserves Used? 

Capital reserves are amounts or funds put aside for settlement of contingencies. They are accounts on a company's balance sheet that are marked for other specific purposes such as long-term projects or offset of capital losses. Capital reserve is often regarded as misdated or dislocated concept, this is because reserve as a term is not captured in the Generally Accepted Accounting Principles (GAAP). Capital reserves do not play any role when measuring the overall wellness of any business, they do not indicate the trading or operational techniques employed by an organization.