Capital Redemption Reserve

accounting journal related to Capital Redemption Reserve Account

1. Redemption of preference shares involves repayment of capital before paying creditors of the
company. It may affect the interest of creditors. In addition to that the working capital of the
company will be depleted as a result of outflow of cash due to redemption. The amount is
capitalized by creating the capital redemption reserve account. As a result this amount will not be
available for distribution of dividend. It helps to protect the interest of creditors and on the other
hand it does not disturb the working capital.