Difference between Capital Reserve and Reserve Capital

Last Updated : 27 Oct, 2022

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Capital Reserves:

The reserves which are created out of the Capital Profits of a firm are known as Capital Reserves. Here, capital profits are the profits that are not earned during the normal course of the business. However, an organisation can not utilise the capital reserve for the distribution of dividends. 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.