A capital reserve is the amount of money kept aside to cover a company’s unexpected expenses. It can also serve as a cushion to absorb potential losses in the future.
Capital reserves are never used to pay dividends to shareholders. For example, in the hospitality industry, a capital reserve can finance property renovation.
Such a reserve is created from the company’s capital profits that are obtained from nonoperating activities (such as selling assets). For this reason, capital reserves can’t be seen as an indicator of operational efficiency.
Capital reserves are recorded in the equity section of the balance sheet.