What is capital reserve??

A type of account on a municipality's or company's balance sheet that is reserved for long-term capital investment projects or any other large and anticipated expense(s) that will be incurred in the future. This type of reserve fund is set aside to ensure that the company or municipality has adequate funding to at least partially finance the project.

Thanks

R Shriram

Can u explain in Simple Language  ....Pls

Capital Reseve:

1]Capital Reseve is the Profit part of Capital which the Company earned from Capital Part or from Long term Contracts.

2]Capital Reserved may be used by Company only for some Specific purpose ( not like revenue reserver from where the Company may distribute the Profit) 

3]Reserve created by the capital surpluses( distinguished from the revenue surplus) of an organisation .

4]Surplus resulting from revaluation of assets of the firm to its current market value;Surplus resulting from business

purchase-the value of assets being more than the consideration paid, Long term capital gains resulting from transfer of capital assets, surplus amount on forfeiture of shares,etc., are also examples of capital reserves.

Capital profit is the source of capital reserve.It is used to meet capital losses.it does not indicate the operating efficiency of the business and Capital reserve does not exist if there is no capital profit.

It is a reserve where all capital gains goes as income & it is converted into capital later by issue of bonus shares. It can not be used to distribute dividends.

Thus practically, it is treated as capital in financial analysis. 

Just a snapshot. Google it for further details...

Also, management normally takes time to convert it into capital because it can bring down 'return on capital'.  They keep capital gains as reserve to keep 'return on capital' high since it is an important ratio.

They convert it into capital only when they find long term usage of that money and are assured that they'll be able to provide stable returns on it.

Since it cant be used for any other purpose, stake holders (banks/lenders/creditors/debtors) normally see it as part of capital. 

Capital reserve: It is a fund set aside for the specific purpose and cannot be distributed for other uses. Normally it is legally not distributable as dividends to shareholders 

* Reserve created as a result of Capital Profits

   Ex: premium on issue of shares,

         surplus arising out of revaluation of fixed assets

         grant (of capital nature) received

         profit on sale of assets (other than stock)

* Not available for distribution of dividend. Howewver, may be capitalised by thye way of bonus issue etc.

* Capital losses may be set off against such reserve. Revenue losses cannot be set off against such reserve

* It may be noted that, where it is set aside for specific purposes, corresponding INVESTMENTS shall be made out of such reserves

what if any company does not has any capital reserve.... will it not be allowed to issue bonus share?????? plz specify the disadvantages of not having the capital reserve in balance sheet

Bonus shares is a process of capitalization of reserves...it doesnt matter which reserve...doesnt specifically says capital reserve...u can use sec premium, p and l also