What is the capital reserve?

Capital reserves are funds that are earmarked for use with specific projects that represent a long -term capital investment or that may be related to some kind of capital costs in the future. It is not uncommon for local and national governments to create reserves of this type as a means of gradually growing funds to expected future needs. The capital reserve can also be established by a company of any size and be used for ongoing projects or as a means of preparing for a future project.

The main idea of ​​the capital reserve fund is to cancel assets that are outside the usual operating budget, and can be used to compensate for projects that must be financed at least partially outside the operating budget. For example, the municipality may want to build a new town hall. If the funds are not earmarked in the budget for the start of preparation for this activity, the yield from the capital reserve may be downloaded to manage the costY to prepare tractupozem for a new building, create plans and generally prepare for the construction of a new facility. Depending on the amount of funds in the capital reserve fund and the regulation that controls the payouts from this fund, it may be possible to finance the entire construction project using a reserve.

Companies can use the capital reserve in almost the same way. The reserve fund can be grown for many years, usually by transferring excess gains generated from time to time to the fund. If the enterprise is to be expanded, possible by opening a new retail socket or creating a new production facility, the assets contained in the capital reserve may be available to start these projects. The use of reserves allows the company to control the process without having to obtain external financing, thus eliminating the need to pay interest on loans or lines of the credit to successfully complete the extension project.

Any funds that are located in the capital reserve must be included in the financial records of the municipality or company. For municipalities, this means identifying the origin of all funds deposited in reserves, including donated funds and funds obtained through government subsidies. Businesses must also accurately responsible for the origin of any assets assigned to the capital reserve. In many countries, the laws are regulated as the capital reserve must be managed and provide a basic framework for how the government or company will structure and maintain a reserve, including how the funds are earmarked for specific types of capital expenditure.