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Capital reserve Vs. Reseve Capital

Question BankCategory: Finance & EconomyCapital reserve Vs. Reseve Capital
Anil asked 2 months ago

what is the difference between capital reseve and reserve capital

1 Answers
Rajesh answered 2 months ago

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:

  1. Capital Reserve:

    • 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.
  2. Reserve Capital:

    • 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.

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