Capital Reserve Journal Entry
Capital reserves are reserves that are created from profits earned from non-operational activities, suchas profits from the sale of fixed assets or the revaluation of assets. These reserves are not meant for distribution as dividends but are kept for specific purposes like future expansion, meeting contingencies, or writing off capital losses.
Scenario: Transfer of Profit from Sale of Fixed Asset to Capital Reserve
Assume a company sells a fixed asset and makes a profit of ₹100,000. This profit is to be transferred to the capital reserve.
Journal Entry
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Profit on Sale of Fixed Asset A/c | 100,000 | |
| To Capital Reserve A/c | | 100,000 |
| (Being profit from the sale of a fixed asset transferred to capital reserve) | | |
Detailed Example:
Example 1: Profit from Sale of Fixed Asset
Assume a company sells a piece of machinery for ₹300,000. The machinery had an original cost of ₹200,000 and accumulated depreciation of ₹150,000. The book value of the machinery is ₹50,000, resulting in a profit of ₹250,000 (₹300,000 - ₹50,000).
Step 1: Recording the Sale of Machinery
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Cash/Bank A/c | 300,000 | |
| Accumulated Depreciation A/c | 150,000 | |
| To Machinery A/c | | 200,000 |
| To Profit on Sale of Machinery A/c | | 250,000 |
| (Being sale of machinery recorded and profit recognized) | | |
Step 2: Transferring Profit to Capital Reserve
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Profit on Sale of Machinery A/c | 250,000 | |
| To Capital Reserve A/c | | 250,000 |
| (Being profit from the sale of machinery transferred to capital reserve) | | |
Additional Example:
Example 2: Revaluation of Asset
Assume a company revalues its land, increasing its value by ₹500,000. This increase is to be transferred to the capital reserve.
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Land A/c | 500,000 | |
| To Revaluation Reserve A/c | | 500,000 |
| (Being revaluation of land) | | |
Transfer to Capital Reserve:
| Particulars | Debit (₹) | Credit (₹) |
|---|
| Revaluation Reserve A/c | 500,000 | |
| To Capital Reserve A/c | | 500,000 |
| (Being transfer of revaluation surplus to capital reserve) | | |
