For any person working in Finance domain, it’s very important to understand the difference between the terms capital reserve, reserve capital and revenue reserve. All these reserves are components of general reserve. This article will try to explain these three terms separately in order to explain the difference between them.
Capital reserve is simply a reserve maintained by an organization to deal with the adverse situations like market instability and inflation. In normal situations, reserve capital is the capital raised by an organization through various non trading activities. For example- In the times of inflation the confidence of investors can be raised through re-evaluation of the asset reserves because it will increase the book value of the firm. Similarly, an organization can allocate some share of its profit as capital reserve (capital redemption) simply for buying the organization’s own stocks when the market is downward in order to maintain the value of stocks. This activity is known as buying back of shares, many organizations do such efforts to retain and protect the interest of their shareholders. Moreover any profit or gain from the reissuance of forfeited debentures and shares can be classified as capital reserve. The capital reserves can then be used to record various fictitious assets. Under normal situations, organizations never use capital reserves for the purpose of dividend distribution.
This is the capital of an organization that is simply not called till the moment. Under normal run, organizations have many subscriptions due and not called. Organizations can call these due subscriptions at any point of time depending upon the requirement. This kind of capital existing in uncalled reserves is known as reserve capital and it should never be confused with capital reserve.
Revenue reserves are simply the reserves that an organization creates from various trading activities. Retained earnings are very important examples of revenue reserves. Organizations can use revenue reserves for the purpose of dividend distribution.