Treatment for Capital Reserve

This query is : Resolved 

04 October 2009

In case of companies registered under companies act,1956
1. If the company gains profit on sale of asset, sale of investment( i.e the company is not having investment activity as its main source) or capital gain(short/long term) on sale of mutual funds/property , in these cases whether the said gains/profit is to be credited to capital reserve (ie. shown to Liablities side of Balance Sheet) or to be credited to profit / loss account.
Further if credited to profit /loss,will it be treated as revenue income & if yes, then on what basis dividend to be declared ?

2. If there is loss on sale of asset, captial loss then whether to be debited to profit/loss account or to be shown under Miscellaneous exps.( Asset side of Balance Sheet )?

3. Further let may help to know which proit/gains come under capital reserve.

Sreedhar Atchutuni ACA,GradCWA (Expert)
05 October 2009

Capital Reserve means resource created by accumulated capital surplus (not revenue surplus)of a firm such as upward revaluation of its assets to show at their current market value after appreciation,profit on issue of forfeited shares etc. Allocating such sums to capital reserve means they are permenently invested and will not be paid as dividends.

Profit/ loss on sale of assets, investments, property will go to P&L a/c but not to Capital Reserve.

amit (Querist)
11 October 2009

By crediting the profits gained on sale of asset,it will be reflect as revenue earnings instead of capital earnings & automatically, due to this there may be a possibility that the company can't bifurcate which is revenue profit & capital profit. This problem arises during distribution of dividends as most of the companies merge their revenue & capital profit together.
By crediting the capital profits to capital reserve,the company can bifurcate between revenue & capital earnings.

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