Difference Between Revenue Reserve and Capital Reserve

Main Difference

The main difference between Revenue Reserve and Capital Reserve is that Revenue Reserve refers to the sum of money retained in the business, to meet future contingencies. Capital Reserve refers to a fund, that is created to finance long term project or write off capital expenses.

Revenue Reserve vs. Capital Reserve

Revenue reserve created from the trading or operating activities of the business. But the capital reserve is created from the capital profits of the business which are always non-operational. Revenue reserve distributed as dividends to shareholders. Capital reserve, on the other hand, is using for funding a company’s project/s or for preparing for any future contingency.

Revenue reserve is effective for short and mid-term urgency/requirement whereas the capital reserve is effective for long term purposes. Revenue reserve always received in monetary terms. The capital reserve not always received in monetary value.

The popular example of revenue reserve retained earnings. The popular example of the capital reserve is reserve created out of profits made for selling off assets of the company. Revenue reserve may occur even if there is loss in a specific year whereas capital reserve does not occur if there is no capital profit. Revenue reserve displays the operating efficiency of the business and capital reserve does not displays the operating efficiency of the business.

Comparison Chart

Revenue ReserveCapital Reserve
Revenue Reserve relates to the sum of money retained in the business, to meet out forthcoming contingencies.Capital Reserve relates to a fund, that is created to finance long term project or write off capital expenses.
Distribution
Shareholders are confining on the discretion of the company.Is never distributed.
Monetary Value
Can always be received in monetary value.Can’t always be received in monetary value.
Examples
Conserved earnings.Reserve made out of profit on sales of fixed assets.
Application
Performs as a reinvesting source for the business.Performs as a provision for future contingencies like inflation, instability, etc.
Term
Is useful for short and mid-term purposes.Is useful for long term purposes.
Another Purpose
A segment or portion is always reinvested to the company or distributed as a dividend.Can also be used for legal purposes.

What is Revenue Reserve?

Revenue reserves created out of profits earned from the operations of a company. It reflected in profit and loss appropriation account. It used for the dividend to shareholders, expansion of business and stabilizing the dividend rate. Revenue reserves divided into two types & each is retained aside for appropriation for profits.

General reserves are created out of profits & retained aside for the general purpose and financial strengthening of the firm, it doesn’t have any special intention to fulfill and can be used for any useful reason in future. Such reasons contain meeting contingencies and expansions that not foreseen.

Specific reserves, on the other hand, are made keeping a particular reason in mind and can only be used for its appointed purpose. Examples of such reserves contain Dividend Equalization Reserve, Debenture Redemption Reserves, Contingency Reserves, Capital Redemption Reserves and more.

What is Capital Reserve?

A reserve made up of capital profit is simply called a capital reserve. The capital reserve is a record on companies’ statement of financial position or balance sheet, which is reserved for long term capital investment plan or reserved to pay off any anticipated expenses.

Simply, the capital reserves are created by companies, to face contingencies similarly inflation, instability, and some other purposes discussed above. Normally, capital reserves elevated by non-trading activities of the company. Revaluation reserve and share premium (increase in the value of non-current assets in surplus to the book value) are the two most renowned examples for capital reserve.

Profit on sale of an asset, profit on the sale of shares and debentures, profit on the redemption of debentures, profit on purchases of a running business are some other elements which can contribute to capital reserve. The capital reserve can be used to repurchase company shares, as well.

Profit on Capital Reserve

  • Profit on sale of fixed capital or investment.
  • Pre-incorporation Profit
  • Premium on issue of securities
  • Profit on redemption of debentures.
  • Profit on the reissue of forfeited shares
  • Profit on revaluation of assets and liabilities.

Key Differences

  1. By revenue reserve we mean a section or part of profit retained in the business, to meet future expenses or losses. On the contrary, the capital reserve defined as a reserve fund, which is made for a specific purpose, i.e., to finance large-scale plans or projects or write off capital expenses.
  2. The primary objective of the creation of a revenue reserve is to meet unforeseen contingencies and improve the entity’s financial position. Conversely, the capital reserve is created to comply with the legal requirements or accounting principles.
  3. The dividend declared out of revenue reserve, but it is not declared out of the capital reserve.
  4. Profit arises out of the day to day business activities used for the formation of revenue reserves. Conversely, the profit rising as a result of non-operating business activities are the source of capital reserve.
  5. Revenue reserve is of two kinds, i.e., a general reserve which used for any purpose, and specific reserve which used for a specific purpose only.

Conclusion

Origination of reserves is vital for the business, to safeguard itself from any unexpected losses or contingencies, that may arise in the future. While a revenue reserve portrays the operational efficiency of the concern, which is not in term of capital reserve.