Capital Reserve and Revenue Reserve Differences
The primary difference between revenue reserve and capital reserve is that revenue reserve is the reserve which is created out of the profits of the company generated from its operating activities during a period of time whereas the capital reserve is the reserve which is created out of the profits of the company generated from its non-operating activities during a period of time.
Reserves are one of the most notable appropriations of profits. Companies create reserves so they can be ready to face any contingencies in the near future. 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., and another is a revenue reserve.
- A company creates Revenue reserveRevenue ReserveRevenue Reserve, also known as Retained Earnings, is a reserve type created out of profits that a business generates from its operating activities over a given period. It is used to expand the business operations or to handle contingencies in the long run. from the net profit companies make out of their operations. Companies create revenue reserves to quickly expand the business. And revenue reserve also helps the companies to source their capital from their internal profits. As an example, we can talk about retained earningsRetained EarningsRetained Earnings are defined as the cumulative earnings earned by the company till the date after adjusting for the distribution of the dividend or the other distributions to the investors of the company. It is shown as the part of owner’s equity in the liability side of the balance sheet of the company..
- A capital reserve, on the other hand, is created out of capital profits. The purpose of the 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 the sale of shares, etc.
In this article, we will do a comparative analysis of these two reserves.
Capital Reserve vs Revenue Reserve Infographics
Key Differences Between Capital Reserve and Revenue Reserve
- A company creates a Revenue reserve from the trading or operating activitiesOperating ActivitiesOperating activities generate the majority of the company's cash flows since they are directly linked to the company's core business activities such as sales, distribution, and production. of the business. But the capital reserve is created from the capital profits of the business, which are always non-operational.
- The company can distribute Revenue reserve as dividends to shareholders. In contrast, the Capital reserve is used for funding a company’s project/s or for preparing for any future contingency.
- Revenue reserve is useful for short and mid-term urgency/requirements. The capital reserve is useful for long term purposes.
- A Company always receive Revenue reserve in monetary terms, whereas capital reserve is not always in monetary value.
- Retained earnings are a popular example of revenue reserve. The popular example of the capital reserve is a reserve created out of profits made for selling off assets of the company.
|Basis for Comparison||Revenue Reserve||Capital Reserve|
|Inherent meaning||Created 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.|
|Distribution||Depending on the discretion of the company, a company may distribute as a dividend to shareholders.||Is never distributed;|
|Term||It is useful for short and mid-term purposes.||It is useful for long term purposes.|
|Monetary value||Always received in monetary value;||Not always received in monetary value;|
|Other purposes||The company always reinvests back a portion or distributes as a dividend.||Also used for legal purposes;|
|Examples||Retained 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..|
The company creates a Revenue reserve, so that the core of the business can get strengthened. Capital reserve, on the other hand, 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. 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.
A company cannot share Capital reserve 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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