Capital reserve and reserve capital are two distinct concepts in accounting and finance. They have different purposes and are treated differently on a company’s balance sheet. Here’s the difference between the two:
- Capital reserves are profits that are not distributable to shareholders as dividends.
- These reserves are typically created through non-operating activities, such as the sale of assets or revaluation of assets. They can also be created from the profits earned from the issue of shares at a premium.
- Capital reserves are considered part of the company’s permanent or long-term capital and are not available for distribution to shareholders.
- They are often used to absorb losses, restructure the company, or finance specific capital expenditures.
- Capital reserves are generally shown on the liabilities side of the balance sheet under the “Reserves and Surplus” section.
- Reserve capital, on the other hand, refers to a portion of the company’s authorized share capital that is not issued to the shareholders.
- It is essentially the capital that the company has the authority to issue but has not yet issued to the shareholders.
- Reserve capital can be used for various purposes, such as issuing additional shares in the future without requiring changes to the company’s Articles of Association.
- It is essentially a part of the company’s share capital structure and does not represent retained earnings or accumulated profits.
- Reserve capital is not typically reported on the balance sheet as it is more of a legal or regulatory concept.
In summary, capital reserves represent retained earnings that are not available for distribution to shareholders, while reserve capital is a part of the authorized share capital that has not been issued. These two concepts serve different purposes and are reported differently on financial statements.