Capital Reserve vs Revenue Reserve - What’s the Difference?

Last Updated On -23 Oct 2025

If you are an accounting student and are planning to create a career out of it, you must know about various types of reserves. Two specific types of reserves, which are quite significant for a company, namely the capital reserve and the revenue reserve. Let us explore the key features, differences between the two types of reserves, and their purpose.

What is Capital Reserve?

The money reserve set aside for an organization in times of crisis or events, such as inflation or a market crisis, comes from capital profits. Capital reserve is a type of reserve that is created to help the business prepare for new project funds and business expansion.

When capital assets are sold in the planning process, the profit that is earned is collected in a capital reserve. It contributes to the overall profit earned from the sales of shares and fixed assets, thus effectively meeting the purpose of the reserve.

What is a Revenue Reserve?

The net profit of an organization or a company in a financial year contributes to a type of reserve called the revenue reserve. This reserve is kept for future investments and to meet the requirements of the business of company.

The revenue profit of the business is earned from the everyday operations of catering to the business environment. The reserve is created from the collection of the annual revenue profit; thus, integrated into a profit and loss appropriation account.

Capital Reserve vs Revenue Reserve: Key Differences

The two significant reserves of money in accounting are used for operational and non-operational purposes. Below are significant key differences between capital reserve and revenue reserve, depending on various forms of business organization. Let us go through the various key features of the capital reserve and the revenue reserve.

Features	Capital Reserve	Revenue Reserve
Source of Profit	Capital profits - specific sale of major assets Example - share premium, selling a fixed asset	Operating profits - day-to-day business activities Example - selling products or services, investing for future success
Purpose	Non-operational needs like buying new assets, absorbing capital losses, and long-term expansion	Operational needs like funding working capital, providing for future contingencies, and paying dividends
Use for Dividends	Not available for distribution as dividends	It is available for dividend distribution to shareholders
Tenure	Long-term projects	Short-term purpose
Example	When a piece of land is sold, the profit from that is transferred to the capital reserve	When normal sales and operations take place, there is profit from that which is transferred to a revenue reserve

Impact of Capital Reserve on Business Success

The capital reserve helps a company by improving the strength of the balance sheet. A company becomes more resilient during economic uncertainty or financial downturns. This reserve helps in contributing to the non-recurring expenditures, like acquiring another company or expanding infrastructure.

It further enhances the investor trust, along with attracting capital structure of the company’s savings structure. The capital reserve absorbs any severe impact on business functions, impacting the overall operational performance.

Impact of Revenue Reserve on Business Success

The revenue reserves help a business expand and grow as the money collected leads to investment towards market expansion, new product development, and upgrading technology. With this reserve, businesses get an available fund to tackle short-term uncertainties, manage cash flow, and meet the working capital requirements and needs.

If there are any type of operational risks, it is the revenue reserve that comes in handy. Furthermore, there are major disruptions like unexpected sales and expenses which can be dealt with this reserve in business finance.

Wrapping Up!

In conclusion, both capital reserve and revenue reserve are two significant types of reserves with different origins, usage, and purposes. Both have their impact on the businesses, reflecting the way a business operates. Be it expansion or dealing with a crisis, both these reserves will contribute to strategic growth.

Frequently Asked Questions on Capital Reserve vs Revenue Reserve

Are capital reserves mandatory for all companies?

The capital reserves are not mandatory. There are specific capital transactions, like share premiums and asset revaluation, which are at times needed for a company that is when the capital reserve comes into the picture.

Can revenue reserves be converted into capital?

The revenue reserves can be converted into capital. Bonus shares are issued to shareholders as the revenue reserves are capitalized; hence, the process turns the revenue reserve into the share capital of the company.

What is the purpose of revenue reserves?

The purpose of revenue reserves is to cover future expenses, reinvest in the business, and pay consistent dividends. It helps in establishing financial growth and flexibility.

Why do companies create capital reserves?

Companies create and use capital reserves to cover capital losses and strengthen their financial base. It helps in future investment and issuing bonus shares.