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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 −
| Capital Reserve | Revenue Reserve |
|---|---|
| Capital reserve are the funds to create financial long term projects/to write off capital expenses. | Revenue reserve is the total amount retained to meet future contingencies. |
| Capital reserve are created for nontrading activities. | Revenue reserve is created for trading activities. |
| The capital profit of the firm act as source of capital. | In revenue reserve, the revenue profit of the form act as a source. |
| The main aim of the capital reserve is to adhere statutory requirements/accounting principles. | The main aim of revenue reserve is to meet unforeseen contingencies and improve entity’s financial position. |
| Capital reserve is for long term purpose. | Revenue reserve is for short term and mid-term purpose. |
| Capital reserve can’t be received in monetary value. | Revenue reserve can received monetary value. |
| Capital reserve used for legal purpose. | A portion of revenue reserve is always re-invested. |
| Capital reserve utilized for purpose for which it is created. | Revenue reserve is used for any or particular purpose only based type of reserves. |
| Capital reserve is not available for dividend distribution. | Dividend is distributed from the 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.
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