Differences between Capital Reserve and Reserve Capital

Many people think that both capital reserve and reserve capital are same and there are no differences between the two, which is not correct, they both are different from each other –

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.

14 comments… add one

  • exccellent explanation…

  • Shakti

    Superb ellaboration…….
    Bt one ques.
    Is capital reserve mandatory for company?


    i find these diffrence from a long period …..excellent…..best…

  • anand

    superb explanation

  • rakesh

    why Reserve capital is not disclosed in the balance sheet of the company

    • Vinish Parikh

      Since reserve capital is uncalled (that is not called from shareholders of the company) and not received by the company it is not shown in the balance sheet of the company.

  • sara

    why capital reserve is shown on the liabilities side of the balance sheet???????? i mean how it becomes liability?? what is reason of showing it on liability side?

    • Sabu

      About my thinking, capital reserve shown in liablities side, for. Capital reserve is requirnes for the prepration of books of account and to share capital ,….capital reserve is make to full fill of absenties of company shareholder for future requirnes that the capital of company is reserve to them…..

    • Kshitij Pachghare

      Capital reserve is shown on the liability side, because of “Business Entity Concept” of accounting..
      Which says that business and owner (share holders, in this case) are two different entities and accounts are prepared from the view of business…
      Capital reserve is a liability to business towards its owner…
      As ultimately business have to give it to owner…
      Every profit generated in business belongs to owner, hence unless it is paid of it remains as liability to business……

  • Shalu pathak

    Mindblowing explanation.

  • M.S.Lokesan

    very Nice Explanation Vinish Parikh Sir, Thank You :-)

  • surya

    Answers are in simple language, so it’s easy to understand. thanks letslearnfinance for giving such an ans.

  • Hasina

    It’s really useful

  • Shivam

    Excellent explanation

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