Difference Between Capital Reserve and Revenue Reserve

Updated on January 3, 2024
Article bySayantan Mukhopadhyay
Edited byAshish Kumar Srivastav
Reviewed byDheeraj Vaidya, CFA, FRM

Capital Reserve and Revenue Reserve Differences

The primary difference between revenue reserve and capital reserve is that revenue reserve is the reserve created out of the company’s profits generated from its operating activities during a period. In contrast, the capital reserve is the reserve created out of the company’s profits generated from its non-operating activities.

Reserves are one of the most special appropriations of profits. Companies create reserves to be ready to face any contingencies shortly. A company can divide reserves into two broad categories – one is the capital reserveCapital ReserveCapital reserve is a reserve that is formed from the company's profits earned from its non-operating activities during a period of time and is retained for the purpose of financing the company's long-term projects or writing off its capital expenses in the future.read more, and another is the revenue reserve.

In this article, we will do a comparative analysis of these two reserves.

Capital Reserve vs Revenue Reserve

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Capital Reserve vs Revenue Reserve Infographics

Capital Reserve vs Revenue Reserve Infographics

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Key Differences Between Capital Reserve and Revenue Reserve

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Comparative Table

Basis for ComparisonRevenue ReserveCapital Reserve
Inherent meaningCreated from the trading activities of a business;Created from non-trading activities of a business;
Application Acts as a reinvesting source for the business.Acts as a provision for future contingencies like inflation, instability, etc.
DistributionDepending on the company’s discretion, a company may distribute a dividend to shareholders.It is never distributed;
TermIt is useful for short and mid-term purposes.It is useful for long-term purposes.
Monetary valueAlways received in monetary value;Not always received in monetary value;
Other purposesThe company always reinvests back a portion or distributes it as a dividend.Also used for legal purposes;
ExamplesRetained earnings.Reserve created out of profit on sales of fixed assetsFixed AssetsFixed assets are assets that are held for the long term and are not expected to be converted into cash in a short period of time. Plant and machinery, land and buildings, furniture, computers, copyright, and vehicles are all examples.read more.

Conclusion

The company creates a Revenue reserve so that the core of the business can get strengthened. On the other hand, capital reserve serves many purposes – from writing off a capital lossCapital LossCapital Loss is a loss when the value of the consideration received from the result of the transfer of capital assets is less than the aggregate value of the cost of acquisition & cost of the improvement. In simpler words, it can be stated as the loss derived from the transfer of capital assets.read more to financing a new project to preparing provisions for future contingencies.

A revenue reserve is a reserve that shareholders can claim a share of. The shareholders can ask for a dividend if the entire amount of the “net profit” is plowed back into the business. If the company can convince the shareholders that reinvesting the entire amount into the business will only generate better profits, the issue will be solved.

A company cannot share Capital reserves as dividends to shareholders. And shareholders can’t claim their share as well. It is prepared just for the business to achieve urgent, long-term goals.

Revenue Reserve vs. Capital Reserve Video

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