Question

Reserve arising from capital receipts are known as_____.

• A. Capital reserve
• B. Reserve fund
• C. Secret reserve
• D. General reserve

Answer 1

The correct option is A Capital reserve

The term 'Reserves' refers to the profits reatined in the business not having any of the attributes of a 'provision' If however, the provision exceeds the amount which is required to meet the loss or liabilty, the excess is to be treated as reserve. In other words, Reserves means accumulated or undistributed profits.

Basically, there are two types of reserves viz. Revenue Reserves and Capital Reserves.

Revenue reserves are those reserves which are created out of profits available for distribtion by way of dividend .

Capital reserves are those reserves which are not created out of operating profit but they arise out of capital receipts.