01 Jul
Capital reserve and revenue reserve are two types of reserves that companies create. A capital reserve is the funds designated for investment, while a revenue reserve is the funds used for business purposes. Both depend on terms like net assets, basic profit, perpetual/temporary nature, etc. This article highlights the definitions and differences between revenue and capital reserve
Definition Capital reserve
The capital reserve is a part of the profit that is not distributed to the shareholders. Still, that profit is kept in a business to meet sudden events like future expenses or losses, inflation, and to invest in business expansion. A capital reserve is a type of reserve created from capital profits, such as profit on the sales of shares. The capital reserve also can be used to repurchase company shares.
Profit/gain on Capital Reserve
- Profit or gain on sale of fixed capital or investment.
- Pre-incorporation Profit
- Premium on issue of securities
- Profit/gain on redemption of debentures.
- Profit or gain on the reissue of forfeited shares
- Profit/gain on revaluation of assets and liabilities.
Definition of Revenue reserve
The revenue is a type of reserve that is created from net profit. The revenue reserve is also not distributed to the shareholders but is kept for meeting future requirements or long-term projects of the business.
There are two types of reserve revenue.
General reserve
The type of revenue reserve in which a fund is reserved for an unknown purpose. It is also known as free reserve.
Specific reserve
The type of revenue reserve in which funds can be utilized for a specific purpose. Some examples of the reserve are:
- Debenture redemption reserve
- Investment Fluctuation funds
- Dividend equalization reserve
- Workmen compensation fund
Comparison Chart
Conclusion
To sum up, the above articles, every venture requires some capital reserve to keep its day-to-day operations running smoothly. On the other hand Revenue reserve, on the other hand, is a source of funding that employees can draw upon when they have an urgent requirement.
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