馃攳
Capital Reserve | Definition | Exceptions to Capital Reserve - YouTube
Channel: WallStreetMojo
[12]
hello everyone hi welcome to the channel
of WallStreetmojo watch the video
[17]
till the end also if you are new to this
channel then you can subscribe us by
[21]
clicking the bell ican friends we are
going to learn a concept which is known
[25]
as capital reserve just like you know in
warehouse
[29]
there is goods that have been stored in
the similar fashion every company has a
[34]
warehouse where they keep their profits
amount of the profits in terms of
[39]
results there can be different types of
reserves revenue reserves capital
[43]
reserves revaluation reserves so every
reserve have their own importance and it
[49]
has been organized or it has actually
been placed for their respective
[54]
functions let's understand this one
that's your capital reserve
[58]
let's see what's written in the dialogue
box capital reserve is basically an
[62]
account on the balance sheet to prepare
the company for any unforeseen events
[68]
it's like for any contingent events or
for any uncertain events like inflation
[73]
instability needs to expand the business
or to get into new or urgent projects so
[78]
basically to deal with any contingent
activities capital reserves is actually
[83]
used for the particular activity that
has to be conducted let's understand
[88]
this thing in a complete or detailed
detailed format what we are discussing
[92]
as I told you reserves are of different
types I'll give you a few examples
[97]
revenue reserves then we have capital
reserves which we are discussing we have
[103]
revaluation reserve right so these are
the couple of examples through which one
[109]
can understand reserves what is it
what's the importance now as far as the
[114]
capital reserves are concerned in our
case we are going to deal with this with
[119]
the help of an example of you see as an
example we can talk about profit on sale
[126]
of fixed assets or I would say profit on
sale of shares so these are the two
[135]
examples that one can work with when we
are talking about capital reserves now
[141]
remember one thing
it works in a quite different
[144]
when a company you know sales off
its assets and makes a profit over here
[151]
then a company can transfer the amount
into capital reserve so the this kind of
[156]
activity the amount can be transferred
to the capital reserves since a company
[162]
sales many of its assets and the shares
in that scenario and cannot always make
[169]
profit in this particular scenario
shares in assets because sometimes you
[173]
may make loss so it is used to mitigate
for you mitigate or hedge basically any
[178]
capital losses even or any other
long-term contingencies
[185]
so this reserves has been used for this
particular reasons it has nothing to do
[190]
with the trading and the operational
activities that the business that have
[197]
been conducted so it is created out of
for all the non trading you can say that
[202]
activities and the zero capital reserve
can never be an indicator of operational
[209]
efficiency remember one thing of the
business because over here it is created
[216]
out of the non trading activities and
that's why it is not an operational
[220]
efficiency benchmark another thing that
is really very important and significant
[226]
in nature that you know it is not always
received in monetary terms if you are
[234]
talking about capital reserve it is not
always a certain monetary value or terms
[238]
but it is always existent in the book in
the books of accounts you can say always
[246]
after of the business so in terms of
cash not sure but yes in the books yes
[254]
it is there let's take a few more
examples of capital reserves to get more
[260]
in stein and to get more inside of the
same now instead of taking a business
[264]
perspective let's first consider and
individual perspective an individual
[269]
perspective let's say that you would
like to buy a land in future so you
[276]
begin to set aside
some money right like sell off old stuff
[282]
at your home or sell off your old car
this can be all the reasons you have and
[288]
set aside some money from your income
and you create a thing called one saving
[294]
account let's see
you created a saving account to save all
[298]
the money that you have gathered for the
new line and you are not entitled to do
[301]
anything with that money other than
buying the land for yourself in future
[307]
so that amount has to be significantly
or strictly used for buying a line now
[314]
let's extend the similar example to a
business if a company decides to build
[319]
let's say a new office building they
need capital and they don't want a loan
[326]
on a huge amount of from outside loan
from outside as you know the cost of
[333]
capital can greaser in that case in that
case it would be really very huge so
[338]
they plan to build a new building by
creating a capital reserve and they
[342]
decide to sell off for their lands and
their old assets right of the company
[348]
and they and then the money received
from the transaction is transferred to
[352]
the capital reserves so it's like let's
say you sold off there is a sale of land
[357]
over here and you got closely to
$4,000,000 everything is a million and
[363]
you sold off your there was a sale of
your shares and from that you receive
[369]
let's say 10 million so in total you
have 14 million you sold of this your
[374]
shares and land for one specific reason
because you wanted to build a new office
[379]
building it's going to be let's say or a
14 story building so you are going to
[383]
utilize this 14 million to build that
building so you will transfer this to
[387]
your capital reserve for specific
activity the money received from this
[393]
transactions is is transfer to the
capital reserve and since the company is not
[398]
entitled to be any dividend or to the
shareholders out of or out of their
[403]
reserves they can use their amount for
building a new office building for the
[407]
company we have by far now understood
the examples of capital
[412]
let's understand the exception see
sometimes it is not created for any
[415]
particular or long-term projects or
rather you know when a company feels
[421]
that they need to be prepared for any
economic you can say instability or
[428]
inflation or recession or you know
cutthroat competition then in that
[432]
scenario they can set aside some money
from their profits and they make a
[437]
selling of the assets on land or
whatever may be the case from purchasing
[441]
a small company and create a reserve for
the particular reason now you know
[445]
capital reserve accounting can also be
used for mitigating any capital losses
[454]
now since you know the profit off from
the sale of the asset all right for you
[459]
profit from the sale of the asset or are
not always received in terms of monetary
[467]
value and which we know very well so
they are caught in the books of accounts
[471]
and it is a similar with the losses on
the sale of assets so using the capital
[478]
result the company can set off the
capital losses also so based on our
[488]
discussion of all of this content it is
it's clear that you know capital reserve
[494]
accounting is a create source for
financing any long term projects and a
[499]
company which isn't very keen to do
funding from the external source like
[503]
that debt term loan and so on and so forth can use this kind of results to fully
[508]
finance their new projects so that's it
for this particular topic if you have
[512]
learned and enjoyed watching this video
please like and comment on this video
[516]
and subscribe to our channel for the
latest updates
[520]
thank you very much Cheers
Most Recent Videos:
You can go back to the homepage right here: Homepage