A reserve (reserve account) that an entity sets aside out of capital profits, i.e, profits from non-core operations and activities (in other words, non-operating activities), for the purpose of covering any capital losses that may arise in the future. This reserve can be used for the purpose of financing long-term projects (also called capital projects) or writing off any capital expenses that may materialize in the future. Sources that may contribute to a capital reserve also include any upward revaluation of the assets, profits earned on sale of fixed assets (disposal at profit), profits earned on re-issue of specific types of shares, etc.
In terms of utilization, capital reserves can also be used for issuing bonus shares and writing off intangible assets.
A capital reserve is presented in the statement of financial position (SFP) as part of owners’ funds (equity).
Broadly speaking, the main types of reserves are revenue reserves and capital reserves.
