Learn Accounting Entries For Capital Reserve And Revenue Reserve On Your Own:

Capital reserve crop up either upon revaluation of an asset orfrom gain on sale of long-term assets or on settlement of liabilities to finance long term project. Capital Reserve is created out of capital profits & are normally not distributed as dividends to shareholders. As a rule of thumb , it cannot be created out of profits earned from core operations of a company.

Revenue reserves are those that are created out of revenue profits or distributable profits to meet out future contingencies (if any)

The accounting mechanism of "Capital Reserve" is used to conserve profits. The system of "Capital Reserve" provides financial stability to the concern.

Capital Reserve crop up either from gain on sale of long-term assets or on settlement of liabilities. Capital Reserve may also arise due to the sale of equity shares at a premium. Further, due to legal obligations, some amount revenue profits may also be added to capital reserve but Capital Reserve does not include any free balance that might be used for the distribution of profits.

The following capital profits can be added to Capital Reserve:

  1. Profits arising from sale of fixed assets
  2. Profits on re-issue of forfeited share
  3. Issue of shares at premium
  4. Profits arising due to amalgamation and absorption of companies
  5. Profit earned prior to incorporation of a company can also be added to Capital Reserve

Capital reserve is treated as liability and capital reserve account is debited when it is utilized and utilization of capital reserve during an accounting period must be specifically disclosed either in the balance sheet in foot-note of the financial statements.

Revenue Reserves:

Revenue Reserves are those that are created out of revenue profits or distributable profits. It is also to be noted that all distributable profits are not always available for paying dividend since a certain amount are sometimes required to be kept aside either by law (minimum) or as a managerial decision (higher amount) for business needs. It is only the remaining profits left after deduction that will be available for distribution by way of dividend.

Few examples of revenue reserves are:

  1. General Reserve
  2. Dividend Equalization Reserve
  3. Debenture Redemption Reserve (only after complete redemption of those debenture under whose trust deed this reserve were created).
Accounting Entry:

Profit & Loss A/c ---------- Dr.

            To Reserve A/c