Question

Distinguish between 'revenue reserve' and 'capital reserve'.

Answer 1

Revenue reserve is created out of revenue profits. On the other hand, the capital reserve is primarily created out of capital profit and exceptionally out of revenue profits. The purpose of creating revenue reserve is to strengthen the financial position of the concern whereas capital reserve is created for compliance with legal requirements or accounting practices. What is more important is that revenue reserve can be utilised only for the earmarked purpose except for general reserve which can be utilised for any purpose including distribution of dividend and capital reserve can only be utilised for specific purposes as provided in the law in force.