Capital Reserve and Revenue Reserve Differences

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.

  • 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. read more from the net profit companies make out of their operations. 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.read more.On the other hand, a capital reserve is created out of capital profits. For example, we can talk about profit on the sale of fixed assets, profit on the sale of shares, etc. The purpose of the capital reserve is to prepare the company for any unforeseen events like inflation, instability, or the need to expand the business or get into a new and urgent project.

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

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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.read more 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 reserves as dividends to shareholders. In contrast, the Capital reserve is used to fund a company’s project/s or prepare 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 receives Revenue reserve in monetary terms, whereas capital reserve is not always in monetary value.Retained earnings are a popular example of revenue reserve. A popular example of a capital reserve is a reserve created out of profits made from selling off the company’s assets.

Comparative Table

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

This article has been a guide to the Revenue Reserve vs. Capital Reserve. Here we discuss the top differences between revenue reserve and capital reserve and infographics and a comparative table. Here are a few other articles that you may like –

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