Glossary
Capital reserve
A reserve that arises from capital events and cannot be paid out as an ordinary dividend.
What it means
A reserve created other than from normal trading profit, such as a share premium, which is not available for distribution as a cash dividend.
Example
A share premium account is a capital reserve rather than a distributable profit.
Why it matters
It distinguishes funds that must stay in the company from profits free to be distributed.
In practice
A capital reserve sits in the capital and reserves section of the statement of financial position, alongside share capital and revenue reserves. It adds to shareholders' funds and never appears in the income statement. It builds up from one-off capital events, not from trading profit.
Suppose a company revalues its premises upward from RM80,000 to RM110,000. The RM30,000 increase is credited to a revaluation reserve, which is a capital reserve. It cannot be used to pay a cash dividend.
Students often confuse it with a revenue reserve, such as retained earnings or a general reserve. A revenue reserve is built from realised trading profit and can fund ordinary dividends. The difference is whether the surplus has been earned and realised through trading. Keeping capital reserves separate protects creditors, because it stops a business paying out gains that exist only on paper.
If you struggle to sort reserves into capital and revenue, one of our teachers can list the common ones with you and explain the test. Book a trial class.
Related terms
Definitions here are general accounting explanations for study. For your board's exact wording, see its official syllabus via Sources.
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