Differentiate between capital reserve and reserve capital?

Question

Answer

Answer

•Revenue Reserve - Revenue Reserves r those reserves which are created by setting aside a part of the net profit of the business.

•Capital Reserves : Besides the profit earned by business entities from normal source of earning on recurring basis, they also earn capital profit which don't accure to them on recurring basis.

Answer

Capital Reserve” means the part of profit reserved by the company for a particular purpose such as to finance long-term projects or to write off capital expenses. If we reverse the words, then we get a new term “Reserve Capital”. The two terms might seem alike to a layman, but these are not one and the same thing, as they carry different meanings. Reserve Capital shows the part of the authorized capital that has not yet called up by the company and is available for drawing, if necessary.

Answer

Capital Reserve:

Capital reserve refers to the portion of a company's profits that is set aside and not distributed as dividends to shareholders. It is a reserve created by a company to strengthen its financial position and to meet specific long-term requirements. Here are some key points to understand about capital reserve:

1. Definition: Capital reserve is a type of reserve that is created out of profits, and it is not available for distribution as dividends to shareholders.

2. Purpose: The main purpose of creating a capital reserve is to meet long-term financial requirements of a company, such as expansion, diversification, research and development, or debt repayment.

3. Sources: Capital reserve is typically created from various sources, such as the sale of fixed assets, revaluation of assets, or profits earned from the sale of investments.

4. Legal Restrictions: In some countries, there may be legal restrictions on the utilization of capital reserve. It cannot be used for normal business operations or to cover revenue losses.

5. Examples: Some common examples of capital reserve include reserves created from the revaluation of fixed assets, reserves created from the sale of shares or debentures at a premium, or reserves created from the sale of surplus land.

Reserve Capital:

Reserve capital, on the other hand, refers to the portion of a company's authorized share capital that is not issued to shareholders. It represents the amount of capital that a company can issue to shareholders in the future if needed. Let's explore some key points about reserve capital:

1. Definition: Reserve capital is the portion of authorized share capital that is not issued to shareholders but kept as a reserve for future use.

2. Purpose: Reserve capital provides a company with the flexibility to issue additional shares to shareholders in the future without going through the process of increasing its authorized share capital.

3. Nature: Reserve capital is not available for distribution to shareholders as dividends or for any other purpose. It is held as a reserve and can only be utilized by issuing new shares to shareholders.

4. Legal Requirements: In some jurisdictions, companies are required to maintain a certain amount of reserve capital as a safeguard against potential financial risks or liabilities.

5. Use: Reserve capital can be used for various purposes, such as raising additional funds for expansion, financing acquisitions, reducing debt, or meeting unexpected financial obligations.

Conclusion:

In summary, capital reserve is a reserve created from profits that is not distributed as dividends and is used to strengthen a company's financial position or meet specific long-term requirements. On the other hand, reserve capital represents the portion of authorized share capital that is not issued to shareholders and is kept as a reserve for potential future use. Both capital reserve and reserve capital play important roles in the financial management of a company, but they serve different purposes and have distinct characteristics.

Similar Commerce Doubts

Differentiate between provision and reserve on the basis of nature.?

Anyone can tell me the exact difference between capital reserve and reserve capital. As I can't get it clear from book.?

True or false Receipts and payments a/c does not differentiate between capital and revenue receipts?

Differentiate between Primary Market and Secondary Market on the following basis: (

Find Total Asset to Debt Ratio when capital employed 22,50,000, investments 1,20,000, Land 10,00,000, bills receivable 3,00,000, cash and cash Equivalents 1,80,000,equity share capital 10,50,000, Debentures Rs 8,00,000,cspital Reserve 2,60,000 statement of profit &loss (35,000)?

Top Courses for CommerceView all

Chapter Notes for Commerce

Economics Class 12

Economics Class 11

NCERT Books & Solutions for Commerce

Economics for CBSE Class 12 Board Examinations

Top Courses for Commerce

Top Courses for Commerce

Suggested Free Tests

Related Content

Commerce Courses

Other Courses

How To Prepare?

Related Exams

Company