Differences Between Revenue Reserve and Capital Reserve
Reserves are one of the most notable appropriations of profits. Companies create reserves so they can be ready to face any contingencies in near future.
Reserves in a company can be divided into two broad categories – one is capital reserve and another is revenue reserve.
Revenue reserve is created from the net profit companies make out of their own operations. Companies create revenue reserve to quickly expand the business. And revenue reserve also helps the companies to source their capital from their own internal profits. As an example, we can talk about retained earnings.
A capital reserve, on the other hand, is created out of capital profits. The purpose of capital reserve is to prepare the company for any unforeseen events like inflation, instability, need to expand the business, or to get into a new and urgent project. As an example, we can talk about profit on the sale of fixed assets, profit on sale of shares etc.
In this article, we will do a comparative analysis of these two reserves.
Let’s get started.
- Revenue Reserve vs Capital Reserve Infographics
- Revenue Reserve and Capital Reserve – Key differences
- Revenue Reserve and Capital Reserve Comparison Table
Revenue Reserve vs Capital Reserve Infographics
There are multiple differences between revenue reserve vs capital reserve. Let’s have a look at them one by one.
Now that we understand the broad differences between Revenue Reserves vs Capital Reserves, let us look at these individual terms in detail.
Revenue Reserve and Capital Reserve – Key differences
There are many differences between revenue reserve vs capital reserve. But here are the most important ones –
- Revenue reserve is created from the trading or operating activities of business. But capital reserve is created from the capital profits of the business which are always non-operational in nature.
- Revenue reserve can be distributed as dividends to shareholders. Capital reserve, on the other hand, is used for funding a company’s own project/s or to prepare for any future contingency.
- Revenue reserve is useful for short and mid-term urgency/requirement. The capital reserve is useful for long term purposes.
- Revenue reserve is always received in monetary terms. The capital reserve is not always received in monetary value.
- The popular example of revenue reserve is retained earnings. The popular example of capital reserve is reserve created out of profits made for selling off assets of the company.
Revenue Reserve and Capital Reserve Comparison Table
|Basis for Comparison – Revenue Reserve vs Capital Reserve||Revenue Reserve||Capital Reserve|
|1. Inherent meaning||Is created from trading activities of business.||Is created from non-trading activities of business.|
|2. Application||Acts as a reinvesting source for the business.||Acts as a provision for future contingencies like inflation, instability etc.|
|3. Distribution||Can be distributed as dividend to shareholders depending on the discretion of the company.||Is never distributed.|
|4. Term||Is useful for short and mid-term purposes.||Is useful for long term purposes.|
|5. Monetary value||Can always be received in monetary value.||Can’t always be received in monetary value.|
|6. Other purpose – Revenue Reserve vs Capital Reserve||A portion is always reinvested to the company or distributed as a dividend.||Can also be used for legal purposes.|
|7. Examples||Retained earnings.||Reserve created out of profit on sales of fixed assets.|
Revenue reserve and capital reserve both serve specific purposes.
Revenue reserve, on one hand, gets created so that the core of the business can get strengthened. Capital reserve, on the other hand, serves many purposes – from writing off a capital loss to finance a new project to prepare provisions for future contingencies.
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 to the business. If the company can convince the shareholders that reinvesting the entire amount into the business will only generate better profits, then the issue would be solved.
Capital reserve can’t be shared 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.
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