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Following are the main differences between capital reserve and revenue reserve
Source
Capital profit is the source of capital reserve. Revenue profit is the source of revenue reserve.
Use
Capital reserve is used to meet capital losses. Revenue reserve is used to strengthen the financial position, distribute dividend, replace fixed assets, and redeem liabilities.
Indication
Capital reserve does not indicate the operating efficiency of the business. Revenue reserve indicates the operating efficiency of the business.
Existence
Capital reserve does not exist if there is no capital profit. Revenue reserve may exist even if there is loss in a particular year.
Capital Reserves vs Revenue Reserves
Reserve is an appropriation of profit. Any company must have financial reserves to meet its sudden financial requirements, for growth and development, to expand the business in other areas, etc. Reserves in any company can be broadly categorized into two based on the kind of profit it appropriates. One category is capital reserve, and the other is revenue reserve. Reserves must be kept aside to meet requirements.
Capital Reserves
A reserve made out of capital profit is simply called capital reserve. Capital reserve is an account on companies’ statement of financial position or balance sheet, which is reserved for long term capital investment project or reserved to pay off any anticipated expenses. Simply, the capital reserves are made by companies, to face contingencies like inflation, instability, and some other purposes discussed above. Normally, capital reserves are raised by non trading activities of the company. Revaluation reserve and share premium (increase in value of non-current assets in excess to the book value) are the two most famous examples for capital reserve. Profit on sale of asset, profit on sale of shares and debentures, profit on redemption of debentures, profit on purchases of a running business are some other elements which can contribute to capital reserve. Capital reserve can be used to repurchase company shares, as well.
Revenue Reserves
Revenue reserves are reserves created out of profit from trading activities. Retained earnings are one of the widely known revenue reserves. When a company earns more profit in one year, based on the retention ratio it may reserve some part of the profit as retained earnings, which is a revenue reserve. Generally, revenue reserves are not kept for long term. Revenue reserves can be distributed among share holders in the form of bonus issue or dividend. The amount that is set aside in the name of revenue reserves is used to strengthen company resources to declare uniform rate of dividend in the future and protect the business from sudden, unexpected loss. This is also known as undistributed revenue profit.
