1. Capital reserve is created out of capital profits (profit due to reevaluation of assets) and therefore it is not available for distribution as dividend to the shareholders, while reserve capital is that part of authorized capital of a company which is not called up by the company. Also there is no special resolution required as in the case of reserve capital, for creating capital reserve
2. Reserve capital can be used by the company only in case of liquidation of the company while capital reserve can be used by company at any time for purchasing long term assets by the company.
3. Capital reserve is shown on the liabilities side of the balance sheet while Reserve capital is not disclosed in the balance sheet of the company.
4. Capital reserve can be used by the company to write off capital losses which arises due to selling of assets at lower prices than the book value of that asset while Reserve capital cannot be used for that purpose.
Capital Reserve Vs. Revenue Reserve:
1. Capital Reserve
The reserve which is created out of the capital profit is known as capital reserve. Capital reserve is created out of the profit of some specific transactions of capital nature. It is not available for the distribution to shareholders as dividend. It is used to meet capital loss. Capital reserve is shown on the liabilities side of the balance sheet. Sometimes, it can be used to issue fully-paid bonus shares.
Items of capital profit out of which capital reserve is created:
• Profit on revaluation of assets and liabilities.
• Profit on sale of assets
• Profit on sale of shares and debentures
• Profit on forfeiture of shares
• profit on redemption of debentures
• profit on purchasing running business
2. Revenue Reserve
Revenue reserve is created out of the revenue profit earned in the normal course of the business. It refers to the undistributed revenue profit. It can be distributed as dividend to the shareholders. Revenue reserve helps to strengthen the financial position of the company and also helps to declare uniform rate of dividend.
Items relating to revenue reserve
• General reserve
• Dividend equalization fund
• Sinking fund
• Research and development fund