Business

Difference between Income Reserve and Capital Reserve

Main difference

The main difference between Revenue Reserve and Capital Reserve is that Revenue Reserve refers to the sum of money retained in the business, to meet future contingencies. Capital reserve refers to a fund, which is created for long-term financial projects or write off capital expenditures.

Income Reserve vs. Capital Reserve

Revenue reserve created from the trading or operating activities of the business. But the capital reserve is created from the company’s capital gains, which are not always operational. Income reserve distributed as dividends to shareholders. The capital reserve, on the other hand, is used to finance a company’s projects or to prepare for any future contingencies.

The income reserve is effective for short- and medium-term needs/emergencies, while the capital reserve is effective for long-term purposes. Revenue reserve always received in monetary terms. The capital reserve is not always received in monetary value.

The popular example of revenue reserve retained earnings. The popular example of the capital reserve is the reserve created from the profits made from the sale of company assets. The income reserve can occur even if there are losses in a specific year, while the capital reserve does not occur if there are no capital gains. The income reserve shows the operating efficiency of the business and the capital reserve does not show the operating efficiency of the business.

Comparison chart

income reserve Capital reserve
The Income Reserve refers to the sum of money retained in the business, to face future contingencies. Capital Reserve is related to a fund, which is created to finance long-term projects or pay off capital expenditures.
Distribution
Shareholders are limited to the discretion of the company. It is never distributed.
Monetary value
It can always be received in monetary value. It cannot always be received in monetary value.
examples
Earnings preserved. Reserve from the profits from the sale of fixed assets.
Request
It acts as a source of reinvestment for the business. It acts as a provision for future contingencies such as inflation, instability, etc.
Finished
It is useful for short and medium term purposes. It is useful for long term purposes.
Other Purpose
A segment or part is always reinvested in the company or distributed as a dividend. It can also be used for legal purposes.
What is the revenue reserve?

Revenue reserves created from profits earned from a company’s operations. It is reflected in the profit and loss appropriation account. It was used for the dividend to shareholders, business expansion and stabilization of the dividend rate. Revenue reserves are divided into two types and each is held for appropriation for profit.

General reserves are created from profits and are held for the general purpose and financial strengthening of the company, are not intended to be held in any special way and can be used for any useful reason in the future. Such reasons contain encounter contingencies and unforeseen expansions.

Specific reservations, on the other hand, are made with a particular reason in mind and can only be used for the designated purpose. Examples of such reserves include dividend compensation reserve, debenture redemption reserves, contingency reserves, capital redemption reserves, and more.

What is Capital Reserve?

A reserve made up of capital gains is simply called a capital reserve. The capital reserve is an entry in the statement of financial position or the balance sheet of companies, which is reserved for the long-term capital investment plan or to pay any anticipated expenses.

Simply, capital reserves are created by companies, to deal with contingencies like inflation, instability, and some other purposes discussed above. Normally, high capital reserves due to non-commercial activities of the company. The revaluation reserve and the issue premium (increase in the value of non-current assets in surplus at book value) are the two most recognized examples of capital reserve.

The profit from the sale of an asset, the profit from the sale of stocks and bonds, the profit from the redemption of bonds, the profit from the purchase of an ongoing business are some other items that can contribute to the capital reserve. The capital reserve can also be used to buy back shares of the company.

Capital Reserve Benefit

  • Profit from sale of fixed capital or investment.
  • Pre-incorporation benefit
  • Premium on securities issuance
  • Benefit for amortization of debentures.
  • Benefit from the reissue of forfeited shares
  • Benefit for revaluation of assets and liabilities.

Key differences

  1. By revenue reserve we mean a section or part of the profits retained in the business, to cover future expenses or losses. On the contrary, capital reserve is defined as a reserve fund, which is held for a specific purpose, i.e. to finance large-scale plans or projects or write off capital expenditures.
  2. The main objective of creating an income reserve is to deal with unforeseen contingencies and improve the financial position of the entity. Rather, the capital reserve is created to meet legal requirements or accounting principles.
  3. The dividend declared outside of the income reserve, but not declared outside of the capital reserve.
  4. Earnings arise from daily business activities used for the formation of income reserves. Rather, profits that increase as a result of non-operating business activities are the source of capital reserve.
  5. Revenue reserve is of two types i.e. a general reserve which is used for any purpose and a specific reserve which is used only for a specific purpose.
Final Thoughts

The origination of reserves is vital for the business, to protect itself from unexpected losses or contingencies that may arise in the future. While an income reserve portrays the operating efficiency of the business, it is not in terms of a capital reserve.

Leave a Reply

Your email address will not be published. Required fields are marked *

Back to top button