In common terms, a Reserve is anything retained for the future. Similarly, in Accountancy, Reserve means a part of the profit that has been retained and kept aside by the companies to meet their future needs. Reserves strengthen the financial position of the companies and make them more competitive. Capital Reserve and Revenue Reserve are the two types of reserves kept by a company to face its contingencies in the future. The Capital and Revenue Reserve is one of the most special appropriations of a company’s profits. The reserves of a company are prepared for multiple purposes. Some of these include:
- Expansion and Diversification of the Company
- Payment of the liability
- Purchasing the fixed assets
- Redemption of Debentures
- Payment of Dividend
- Writing off the losses
What is Capital Reserve?
Capital Reserve is a reserve that is created out of the capital surplus of the organization. These reserves do not emerge out of the profit earned from ordinary business activities and cannot be used for dividend distribution. These reserves are created for specific purposes and can be used for that reason only. Rather, Capital Reserves are used to write off the capital losses of the companies. Capital Reserve is shown on the Liability side of the Balance Sheet under the head ‘Reserve and Surplus’. Capital Reserves are created out of the following items:
- Profit on sale and revaluation of Fixed assets
- Premium on issue of shares and debentures
- Profit on forfeiture and re-issue of shares
- Profit on redemption of Debentures
What is Revenue Reserve?
Revenue Reserve is a part of the profit retained by the companies for multiple future purposes. Revenue Reserve is created out of the profit earned from the core business operations, hence is recorded in the Profit and Loss Account. The Revenue Reserve can be further categorized as:
- General Reserve: General Reserve is a reserve that a company can use for many purposes, like Expansion and Diversification, Payment of Dividends, and so on.
- Special Reserve: Special Reserve is a profit retained for a specific purpose and can be used for that purpose only. For instance, Debenture Redemption Reserve.
Difference Between Capital Reserve and Revenue Reserve:
|
Basis |
Capital Reserve |
Revenue Reserve |
|---|---|---|
| Meaning | Capital Reserve is a reserve created to finance long-term future projects and to write-off the capital losses. | Revenue Reserve is a reserve created to meet multiple purposes in the near future. |
| Source | Capital Reserve is always created out of Capital profit. | Revenue Reserve is created out of the profit earned in the ordinary course of business. |
| Purpose of Creation | These reserves are created for specific purposes and can be used for that reason only. | Revenue reserves are generally created and can be used for n number of uses. |
| Tenure | Capital reserves are used to finance long-term projects. | Revenue reserves are generally used for the short-term financial needs of the company. |
| Dividend Distribution | Capital reserves cannot be used for dividend distribution. | Revenue reserves are used for the distribution of dividends. |
| Example | Reserve created to fund the purchase of new Fixed Asset. | General Reserve and Debenture Redemption Reserve. |