“Capital Reserve” means the part of profit reserved by the company for a particular purpose such as to finance long-term projects or to write off capital expenses. If we reverse the words, then we get a new term “Reserve Capital”. The two terms might seem alike to a layman, but these are not one and the same thing, as they carry different meanings. Reserve Capital shows the part of the authorized capital that has not yet called up by the company and is available for drawing, if necessary.
While the creation of capital reserve is mandatory for all the companies, there is no such compulsion for maintaining reserve capital. In this article excerpt, we have compiled all the important differences between capital reserve and reserve capital. Have a look.
Content: Capital Reserve Vs Reserve Capital
|Basis for Comparison||Capital Reserve||Reserve Capital|
|Meaning||The profit earned by the company through special transaction, that is not available for distributing dividend to shareholders is known as Capital Reserve.||The part of uncalled capital, that is called up only on the event of company's liquidation is known as Reserve Capital.|
|Created out of||Capital profits||Authorized capital|
|Disclosure||On the equity & liabilities side of the balance sheet under the head Reserve and Surplus.||Not disclosed at all|
|Need of creation||Mandatory||Voluntary|
|Specific condition||No such conditions||Special Resolution should be passed at AGM|
|Utilization||To write of fictitious assets or capital losses etc.||Only when the company is about to wind up.|
Definition of Capital Reserve
Capital Reserve is the part of the profit or surplus, maintained as an account in the Balance Sheet that can be used only for special purposes. It is made out of capital profits earned due to the sale of fixed assets at a price greater than its cost or profit on the reissue of forfeited shares. Hence, it is not freely available to be distributed among shareholders as the dividend. It contains the following:
- Share Premium
- Profit on reissue of forfeited shares
- Capital Redemption Reserve (CRR)
- Development Rebate Reserve
The money credited to the asset replacement reserve, with the objective of utilizing for capital purposes only, is also considered as a capital reserve. It can be used for issuing bonus shares, writing of fictitious assets like goodwill, underwriting commission, preliminary expenses, etc., or loss on the issue of debentures. However, the amount of share premium and capital redemption reserve can be used for the specific purposes only, that are described under section 52 and 55 of the Indian Companies Act, 1956
Definition of Reserve Capital
Reserve Capital is defined as a part of subscribed uncalled capital, which will not be called up until and unless the company goes into liquidation. In other words, it is the portion of share capital that is reserved by the company and which will be utilized only on the happening of the said event.
The provisions regarding the reserve capital are described under Section 99 of the Indian Companies Act, 1956. Special Resolution (SR) must be passed by the company at Annual General Meeting (AGM), for determining that the specified portion of the company’s share capital will not be called up except when the company is about to wind up. It is not compulsory for the companies to create reserve capital.
Key Difference Between Capital Reserve and Reserve Capital
The following are the major differences between capital reserve and reserve capital:
- A portion of profit set aside that can be used for specific purposes only is known as Capital Reserve. Reserve Capital is that form of uncalled share capital that can be called up by the company only in the event of the liquidation of the company.
- Capital Reserve the result of accumulating capital profit, whereas Reserve Capital is created out of authorized capital.
- On the equity & liabilities side of the Balance Sheet, Capital Reserve appears under the head Reserves & Surplus. Unlike Reserve Capital, which is not disclosed at all.
- There is a compulsion in the creation of capital reserve by every company which is not in the case of reserve capital.
- For the creation of reserve capital, the special resolution should be passed by the company at Annual General Meeting (AGM).
- Capital Reserve has various uses like writing off fictitious assets, or capital losses, etc. but Reserve Capital is used only when the company goes into liquidation.
After the deep discussion, we can say that capital reserve and reserve capital, both are thoroughly different terms where one represents profit retained for specific purposes while the other accounts for a portion of uncalled capital blocked by the company for a specific event.