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Difference between Revenue and Capital Reserve


Revenue reserves and capital reserves are differentiated on the following grounds:
  1. Source of creation: Revenue reserve is created out of revenue profits, which arise out of the normal business activities and are otherwise available for dividend distribution.

    On the other hand capital reserve is created mainly out of capital profit, which does not arise from the normal business activities and are not available for distribution as dividend. But revenue profits may also be used for creation of capital reserves.
  2. Purpose: Revenue reserve is created to build up the financial position, to meet unforeseen contingencies or for some specific purposes.

    But the capital reserve is created for compliance of legal requirements or accounting practices.
  3. Usage: A specific revenue reserve can be utilised only for the earmarked purpose while a general reserve can be utilised for any purpose including distribution of dividend. Where a capital reserve can be utilised for specific purposes as provided in the law in force, e.g. to write off capital losses or issue of bonus shares.

Basis of difference

Revenue Reserve

Capital Reserve

1. Source of creation It is created out of revenue profits which arise out of normal operating activities of the business and are otherwise available for available for dividend distribution.

It is created primarily out of capital profit which do not arise normal operating activities of the business and not available for dividend distribution.
But revenue profits may also be used for this purpose.

2. Purpose It is created to strengthen the financial position, to meet unforeseen contingencies or for some specific purposes. It is created for compliance of legal requirements or accounting practices.
3. Usage A specific revenue reserve can be utilised only for the earmarked purpose while a general reserve can be utilised for any purpose including distribution of dividend. It can be utilised for specific purposes as provided in the law in force e.g. to write off capital losses or issue of bonus shares.

Fig. 7.5: Difference between capital reserve and revenue reserve





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