Difference between Capital Reserve and Reserve Capital
There are various types of businesses running in the present time. There are factories and industries that manufacture several products like cosmetics, medical equipments, medicines, clothes, etc. These products are used by people daily. For instance, medical equipments and medicines are required by laboratories and doctors on a daily basis. There are several businesses like SMEs, Non-Profit Organizations, Partnership, Sole Proprietorship, Public Limited Companies, Private Limited Companies, etc., that provide consumers with quality products and services.
Now, businesses tend to have profits and losses at the end of the financial year. The profits earned are not readily distributed among the shareholders. A part of the amount is kept aside to cover up future emergencies or investments. In accounts, such kinds of funds are known as a reserve. There are two significant kinds of reserves, i.e., capital reserve and reserve capital. These terms might seem to be the same but are different. So, let us first begin by their meanings.
Capital Reserve
Capital reserve is defined as the reserve created from the capital profits of the company. Capital reserves are created so that they can be used during emergencies and events like inflation, losses, business expansion, etc. The capital profit is earned through the sales of various assets like fixed assets, sale of shares, etc. Some of the examples of the capital reserve include cash, the premium earned from the sale of current assets, revaluing assets and liabilities, etc. Well, it is interesting to note that a special property is kept in the capital reserve, which is only used at the time of contingency.
Now, why is capital reserve important? Well, the money kept in the capital reserve is not used to pay dividends or for investments; rather, they are used for specific purposes like long-term projects and emergencies. In capital reserve, cash is the most liquid kind of short-term asset. The capital reserve isn’t concerned with trading business. The operational health of the business cannot be measured through the capital reserve.
Capital reserves are created through capital profits and are used at the time when the company suffers losses. Generally, reserves are recorded in the liability section of the balance sheet. During the accounting period, the capital reserve account is debited after its utilization. The amount of the capital reserve is mentioned in the footnotes of the balance sheet.
Reserve Capital
Reserve capital is defined as the reserve that is uncalled, i.e., this capital is called only when the company is on the verge of liquefying. Reserve capital is the portion that is reserved by the company. This amount can only be used by the company when a particular event is going to happen, i.e., beginning of the long-term projects, liquidation of the company, etc. Reserve capital is known as the uncalled capital because it is the reserved amount of the company. It is interesting to note that the amount of reserve capital is not depicted in the company’s balance sheet. It is not essential for the company to create reserve capital. In order to create or use the reserve capital, special permission has to be taken/ passed. Reserve capital is the capital that is not received by anyone. The shareholders can get their share of profit from the reserve capital.
Reserve, be it of any kind, is essential for the company. The company’s financial position is improved through the reserves created by the company. The operational activities and productivity is increased due to the reserves in the company. Each reserve is kept for the contingencies that might arrive in the future. Reserves are used accordingly, depending upon their type.
Now, there are certain differences between the capital reserve and reserve capital. So, let us discuss them in brief.
| S.NO. | CAPITAL RESERVE | RESERVE CAPITAL |
|---|---|---|
| 1. | A capital reserve is defined as the reserve that is created from the capital profits of the company. | On the other hand, reserve capital is defined as the reserve that is uncalled, i.e., this capital is called only when the company is on the verge of liquefying. |
| 2. | A capital reserve is used at the time of emergencies like inflations, incurring losses, etc. | Reserve capital is the amount reserved by the company. This amount is used for the events that will happen in the future (long-term projects, investments, etc.). |
| 3. | It is necessary to create a capital reserve. | It is not compulsory to create a reserve capital. |
| 4. | The dividends are not distributed among the shareholders. | The profit earned is distributed among the shareholders of the company. |
| 5. | The capital reserve is written as the liability in the company’s balance sheet. | Reserve capital is not shown in the company’s balance sheet. |
| 6. | Capital reserves are created through capital profits. | Reserve capital is created out of authorized capital. |
| 7. | There are no such conditions for creating the capital reserve. | A special permission/ resolution have to be passed to create reserve capital. |
| 8. | The capital reserve is utilized to write the losses and fictitious assets of the company. | Reserve capital is utilized at the time of the liquidation of the company. |
So, these are some of the contrasting points between the capital reserve and reserve capital. Each company has different reserves for different purposes. Reserves are essential for strengthening the financial stature of the company. In order to pay dividends, cover up losses, and preparing the company for a sudden event, these reserves are necessary. Thus, both capital reserve and reserve capital are significant parts of the company’s reserves.