Difference Between Capital Reserve and Revenue Reserve

Publication Date :

05 Jan, 2018

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Table Of Contents

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 reserve, and another is the revenue reserve.

A company creates Revenue reserve 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 earnings.
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.

Capital Reserve and Revenue Reserve Differences

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 activities 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

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 company's discretion, a company may distribute a dividend to shareholders.	It 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 it as a dividend.	Also used for legal purposes;
Examples	Retained earnings.	Reserve created out of profit on sales of fixed assets.

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 loss 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.