use of CRR

 When the company redeems its preference shares out of accumulated profit, it is necessary to create the capital redemption reserve account. The basic purpose of creation of this account is to protect the interest of sundry creditors and maintain the working capital. 

 The main purpose of creating CRR is to protect the interest of sundry creditors and to maintain the working capital. Redemption of preference shares involves repayment of capital before paying creditors of the company. It may affect the interest of creditors. In addition to that the working capital of the company will be depleted as a result of outflow of cash due to redemption. That is why, the amount is capitalized by creating the capital redemption reserve account.

The capital redemption reserve is used only to issue the fully paid bonus shares to the existing equity shareholders