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RESERVE CAPITAL AND CAPITAL RESERVE

Posted on August 10, 2019 By commerceiets No Comments on RESERVE CAPITAL AND CAPITAL RESERVE

The brief description of Capital Reserve and Reserve Capital is as follows:

Table of Contents

  • RESERVE CAPITAL
  • CAPITAL RESERVE
  • DIFFERENCE BETWEEN RESERVE CAPITAL AND CAPITAL RESERVES

RESERVE CAPITAL

It is a part of the subscribed capital remaining uncalled that a company resolves, by a Special Resolution, not to call except in the event of winding up of the company. Where a company has passed a resolution for Reserves Capital, these shares are shown as ‘Subscribed but not fully paid-up.’

As per Section 65 of the Companies Act, 2013, only an unlimited company having a share capital while converting into a limited company, may have reserves capital. In such a case, the company by a resolution may:

  • Increase the nominal amount of its share capital by increasing the nominal amount of each of its shares, and determine that no part of the increased capital shall be called up except in the event of winding up of the company.
  • Provide that a specified portion of its uncalled share capital shall not be called except in the event of winding up of the company.

CAPITAL RESERVE

Capital Reserves are those reserves which are created out of capital profits. Capital profits are those profits which are not earned in the normal course of the business. These reserves cannot be utilised for the distribution of dividends. Following are the items that give rise to capital profits and hence capital reserves:

  • Profit on sale of fixed assets.
  • Profit on revaluation of fixed assets.
  • Premium on issue of shares and debentures.
  • Profit on redemption of debentures.
  • Profit earned by a company prior to its incorporation.
  • Profit on forfeiture and re-issue of shares.

Capital Reserves are shown on the liabilities side of the Balance Sheet under the head ‘Reserves and Surplus.’

DIFFERENCE BETWEEN RESERVE CAPITAL AND CAPITAL RESERVES

BASIS OF DIFFERENCE RESERVE CAPITAL CAPITAL RESERVE
MEANING It refers to that portion of increased nominal capital or uncalled share capital which shall not be called up, except in the event of winding up. It is that part of reserves which is not free for distribution as dividend.
CREATION It is an uncalled capital. It is created out of capital profits.
NECESSITY It is not necessary to create Reserves Capital. It is necessary to create, in case of capital profits.
RESOLUTION A resolution is required for its creation. No resolution is required for the creation of capital reserves.
REALISED OR NOT REALISED It refers to the amount which has not been received. It refers to the amount which has already been received.
DISCLOSURE IN BALANCE SHEET It is not shown in the company’s balance sheet. It is shown in the first item under the head ‘Reserves and Surplus’ on the equity and liabilities side of the balance sheet.
TIME WHEN IT CAN BE USED It can be used on at the time of winding up of the company. It can be used to write off the Capital losses or to declare a share bonus any time during the life of the company.
WRITING OFF CAPITAL LOSSES It cannot be used to write off capital losses. It can be used to write off capital losses.
CORPORATE ACCOUNTING, KEY DIFFERENCES Tags:CAPITAL RESERVE, RESERVE CAPITAL

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