The term capital reserve is sometimes used for the capital buffers that banks have to establish to meet regulatory requirements which are different from cash reserves that banks to maintain as per Central Bank (RBI) regulations. In general terms, a capital reserve is an account on the balance sheet of a company that can be used for a sum earmarked for specific purposes or long-term projects or mitigating capital losses or any other long-term contingencies or to offset capital losses.
The capital reserve is created from profit earned on sale of fixed assets at a price greater than its cost or profit made from forfeiture of shares, the reissue of forfeited shares, share premium, Capital Redemption Reserve or Debenture Redemption Reserve, or upward revaluation of assets. In simple words, Capital reserve represents the surplus which is not due to retained earnings. Sums allocated to a capital reserve are permanently invested and cannot be used to pay dividends; therefore they are also known as undistributable reserves.