Top 5 Difference Between Capital Reserve and Revenue Reserve
In a firm, not all of the earnings accumulated at the end of a fiscal year are distributed as dividends to shareholders. Some of the profit is allocated for potential future contingencies or investment in growth. This category of cash is referred to as a reserve in the field of accounting.
A corporation has two sorts of reserves:
Capital Reserve and Revenue Reserve.
Capital reserve refers to a financial account that is set aside by a company or organization to accumulate funds for certain purposes, such as future investments, acquisitions, or to cover unexpected expenses.
A capital reserve is a reserve that is formed from earnings generated from capital. A capital reserve is developed with the objective of ensuring the company’s preparedness for unforeseen occurrences such as inflation, business expansion, and funding for new projects.
A capital reserve is established by the accumulation of capital gains generated from the sale of capital assets, such as fixed assets and profits from the sale of shares.
Capital reserves possess the unique characteristic of being permanently invested and are strictly designated for the specific reason for which they were formed, with no possibility of being utilized for any other objective.
A Revenue Reserve refers to a portion of a company’s profits that is set aside and retained for future use or to cover any potential financial obligations.
Revenue reserve is a reserve that is formed from the net profit generated by a corporation in a certain financial year. This reserve is retained instead of being released as dividends to shareholders, and is intended to be used for future business needs.
A revenue reserve is established using the profits generated from the day-to-day activities of the business. The revenue reserve is included in the profit and loss appropriation account.
Now, we will examine the key distinctions between Capital Reserve and Revenue Reserve:
Top 5 Differences Between Capital Reserve and Revenue Reserve
| Aspect | Capital Reserve | Revenue Reserve |
|---|---|---|
| Purpose | Established to fund long-term projects or cover future expenses. | Set aside to address potential short-term needs or cover unexpected occurrences within the company. |
| Source of Funds | Created from capital gains, such as profits from the sale of fixed assets or shares. | Formed from net profits generated through day-to-day business activities. |
| Duration | Typically invested for an extended period and is not intended for immediate use. | Can be utilized for both short-term and long-term business needs, including dividend distribution. |
| Utilization | Funds are reserved for specific long-term objectives and cannot be used for other purposes. | Funds can be used for a variety of purposes, including potential dividend payouts or covering unforeseen costs. |
| Example | Capital reserve is established from the proceeds of selling fixed assets. | Revenue reserve is formed by retaining earnings instead of distributing them as dividends. |
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