The reserves that are created out of the capital profits of a business are known as Capital reserves. Capital profits are the profits that are not earned in normal business activities. These reserves are created out of the transactions which are capital in nature. Therefore, all the capital profits arising from the specific capital nature transactions can be termed as Capital reserves. The following are some examples of capital reserves.
- Profit on sale of fixed assets.
- Profit on re-issue of forfeited shares.
- Profit on revaluation of assets and liabilities.
- Premium received on issue of shares and debentures.
- Profit on redemption of debentures.
- Profit prior to incorporation.
The distinction between Revenue Reserves and Capital Reserves
| Point of Distinction | Revenue Reserves | Capital Reserves |
| Creation | Created out of revenue profits that are earned in the normal business activities. | Created out of capital profits that are not earned in normal business activities. |
| Distribution as Dividend | It can be utilized for distribution as dividends. | It cannot be utilized for distribution as dividends. |
| Aim | Created to meet the future uncertainties and enhancing the financial soundness of the business. | Created to write-off the capital losses or to meet the purpose laid down in the Companies Act. |
| Examples | General Reserve, Debenture Redemption Reserve, Retained Earnings, etc. | Profit on sale of fixed assets, Premium on issue of shares, Profit prior to incorporation, etc. |
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