Explain Revenue reserve and Capital Reserve.

a) Revenue reserve: are created from revenue profits which arise out of the normal operating activities of the business and are otherwise freely available for distribution as dividend. Ex. of Revenue reserves are:

• General reserve
• Workman compensation fund
• Investment equalization reserve
• Debenture redemption reserve

b) Capital reserve: are created out of capital out of capital profits which do not arise from the normal operating activities. Such reserves are not available for distribution as dividend. This reserve can be used for writing off capital losses or issue of bonus shares in case of a company. Ex. of capital profit

• Premium on issue of share or debenture.
• Profit on sale of fixed assets
• Profit on redemption of fixed assets & liabilities
• Profit prior to incorporation.
• Profit on reissue of forfeited shares