Learning Materials For Accounting, Management , Finance And Economics.

Thursday, July 15, 2010

Concept And Meaning Of Capital Reserve And Revenue Reserve And Their Related Items

Concept And Meaning 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

Concept And Meaning Of 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