State the difference between capital reserve and revenue reserve.

In a company, there are two types of reserves namely Capital Reserve and Revenue Reserve. The basic difference between the two is that, capital reserve is the fund created for non-trading activities, whereas the revenue capital is the fund created for trading activities. In this article, we will discuss all the important differences between capital reserve and revenue reserve. But before that, let's start with some basics of capital reserve and revenue reserve so it will become easier to understand how they are different from each other.

What is Capital Reserve?

The type of reserve that is created from the capital profits is known as capital reserve. The main purpose of creating capital reserve is making the company prepared for sudden events such as business expansion, inflation, funds for new projects, etc.

The capital reserve is created from the capital profit earned through the sales of capital assets. Therefore, the capital profit of the company acts as the source of capital reserve.

Capital reserve is aimed for long term and legal purposes. Capital reserve is never available for dividend distribution, but it is used only for purpose for which it is created.

What is Revenue Reserve?

The type of reserve created from the net profit of the company made during a financial year is called revenue reserve. It is the total amount retained to meet the future requirements of the company. The revenue reserve is mainly created for trading activities.

The main aim of revenue reserve is to improve the financial position of the business. This reserve is create for short-term and mid-term purposes. It is also added in the profit and loss appropriation account.

Difference between Capital Reserve and Revenue Reserve

The following table highlights the important differences between Capital Reserve and Revenue Reserve −

Conclusion

The most significant difference between the two is that the capital reserve is created from capital profits earned through sales of capital assets, while the revenue reserve is created from the net profit that the company makes during a financial year.