Reserve Capital

assets set aside by a joint-stock enterprise or a bank for certain purposes or as a general reserve (declared reserves). Reserve capital and fixed capital constitute the assets available to an enterprise (or bank) but not subject to distribution among the stockholders.

Reserve capital is used to write off unrecoverable debts and losses and to pay taxes and interest. It is also used when the market value of securities declines, and it may serve as collateral for future capital payments.

Reserve capital is invested in highly liquid assets (securities) and is often used for the current needs of an enterprise or bank. The reserve consists of annual deductions from profits. The minimum reserve capital and the procedure for its accumulation are stipulated in the laws governing joint-stock companies or in their statutes. For example, in France enterprises are obliged to deduct one-twentieth of their annual net profits for reserve capital, until the reserve equals 10 percent of the share capital. The total reserve capital of a bank is usually significantly greater than its total stock (share) capital, and the reserve capital of a major bank is generally several times its total stock capital. Reserve capital is entered as a liability on the balance sheet of an enterprise or bank.