Capital reserve is money that is built up by a municipality or business so that it can be used for large capital expenditures. On the balance sheet, capital reserves are placed in a capital reserve account.
Sources of Capital Reserve
Funds for a company’s capital reserve can come from income for ordinary operations or other sources such as government subsidies.
The idea behind sequestering funds in a capital reserve account is to ensure that the company is adequately funded to engage in capital expenditures and can effectively plan for them.
In some industries, periodic capital expenditures are necessary to maintain or grow a business. Some examples of capital expenditures include the purchase of fixed assets or costs in preparing an asset for later business use. Capital expenditures are intended to generate a future benefit.
Restrictions on Funds in Capital Reserve Account
Funds placed in a capital reserve account ordinarily may only be used for future capital expenditures. It may not be distributed as dividends.
Publicly Traded Companies
Often publicly companies will include recent capital expenditures in their annual reports so stockholders or interested individuals have the opportunity to learn of how capital reserves are being spent.
Daniel Gruttadaro began writing professionally in 2009. His work appears on Web sites including eHow and Answerbag. Gruttadaro is a licensed attorney in New York. He holds a Juris Doctor from the State University of New York at Buffalo School of Law.