In a business, all the profits earned during the end of a financial year are not utilized in paying dividends to shareholders. A certain amount of that profit is set aside to meet future contingencies or investment in growth that may arise. Such type of funds is called a reserve in accounting terminology.
There are two types of reserves in a company, namely, Capital Reserve and Revenue Reserve.
What is Capital Reserve?
A capital reserve is the type of reserve that is created from capital profits. The purpose for which a capital reserve is created is for preparing the company for sudden events like inflation, business expansion, funds for a new project.
A capital reserve is created from capital profit earned through sales of capital assets such as the sale of fixed assets, profit on the sale of shares.
The special property of capital reserve is that these are permanently invested and cannot be used for any other purpose apart from which it is created.
What is a Revenue Reserve?
Revenue reserve is the type of reserve that is created from the net profit that a company makes during a financial year. This reserve is not distributed to shareholders in the form of dividends but is kept for meeting future requirements of the business.
Revenue reserve is created from revenue profit which is earned from the daily operations of the business. Revenue reserve is added in a profit and loss appropriation account.
Let us go through some of the most significant differences between Capital Reserve and Revenue Reserve:
|
Capital Reserve |
Revenue Reserve |
| Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Definition | |
| A capital reserve is created to finance long term projects for a business | Revenue reserve is created to meet unforeseen events in a business organisation |
| Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Reserve Source | |
| To meet the specific purpose of meeting the accounting principles | To be used as reinvestment for company |
| Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Tenure | |
| Can be used for long term projects | Can be used for short term purpose |
| Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â For dividend payout | |
| Cannot be distributed as dividend | Can be used for dividend payout |
| Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Â Example | |
| Capital reserve is created by the sale of fixed assets | Revenue reserve is created from retained earnings |
| Top Differences in Commerce: |
This article brings out the major differences between the two types of reserve in business, namely, capital reserve and revenue reserve. Stay tuned to BYJU’S for more such interesting concepts.
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