Capital Reserve and Reserve Capital are two different financial concepts used in company accounts, and they should not be confused with each other . Capital Reserve is a reserve created out of a company’s capital profits such as profit on sale of assets, share premium, or pre-incorporation profits, and is generally not available for dividend distribution, while Reserve Capital is that part of the uncalled share capital which is reserved by a company through special resolution and can be called up only in the event of winding up of the company, serving as protection for creditors.
Capital Reserves
Capital Reserves are reserves created from capital profits, i.e., profits that are not earned from the normal operations of a business. These profits arise from non-trading activities such as asset revaluation or transactions involving capital structure. A company cannot use capital reserves for distributing dividends to shareholders. They are generally kept for specific purposes like writing off capital losses or issuing bonus shares (in some cases) The items that give rise to the Capital Profits and ultimately Capital Reserves of an organisation are as follows:
- Profit on Sale of Fixed Assets.
- Profit on Revaluation of Fixed Assets.
- Profit on Redemption of Debentures.
- Profit earned by a company prior to its corporation.
- Profit on forfeiture and re-issue of shares.
- Premium on Issue of Shares and Debentures.
Capital Reserves are shown on the Liabilities Side of the Balance Sheet under the head "Reserves and Surplus".
Reserve Capital
That portion of the increased nominal capital or uncalled share capital of an organisation which shall not be called up, except in the event of winding up is known as Reserve Capital.
Section 65 of the Companies Act 2013 states that, only an unlimited company with share capital while converting into a limited company may have reserve capital. In this case, by a resolution, a company may:
- Increase the nominal amount of share capital by increasing the nominal amount of every share. Besides, it should not call up the increased capital except at the time of winding up of the company, or
- Provide that it shall not call a specified portion of its uncalled share capital except at the time of winding up of the company.
The increased capital in first case and specified portion of the uncalled share capital becomes Reserve Capital and is available for the creditors only, at the time of winding up of the company.
Difference between Capital Reserves and Reserve Capital
Basis | Capital Reserves | Reserve Capital |
|---|---|---|
Meaning and Creation | A reserve which is created out of Capital Profits like profit on sale of fixed assets, profit on revaluation of fixed assets, premium on issue of shares and debentures, etc., is known Capital Reserve. The capital profit s are not earned in the normal course of business. | That portion of the increased nominal capital or uncalled share capital of an organisation which shall not be called up, except in the event of winding up is known as Reserve Capital. |
Necessity | In case of Capital Profits, it is essential to create Capital Reserve. | It is not necessary to create Reserve Capital. |
Resolution | To create Capital Reserve, a firm does not require resolution. | To create Reserve Capital, a firm requires resolution. |
Realised or not Realised | Capital Reserve is the amount that has already been received by the firm. | Reserve Capital is the amount that has not been received. |
Disclosure in Balance Sheet | Capital Reserves is shown as the first item under the head "Reserves and Surplus" on the Equity and Liabilities side of the Balance Sheet. | Reserve Capital is not shown in the Balance Sheet of a Company. |
Time when it can be used | A firm can use Capital Reserves to write off Capital Losses or to declare a share bonus at any time during Company's life. | A firm can use Reserve Capital only at the time of winding up of the Company. |