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The words in both terms are the same but their positioning makes all the difference, do not think that these differences are subtle.
Before answering your question of “what is the difference between capital reserve and reserve capital” let us discuss what the capital reserve and the reserve capital is.
What is Capital Reserve?
The capital reserve is a type of reserve that is created out of the capital profits; profit not from the normal course of the business i.e. profit from the exceptional items like:
- Sale of fixed assets.
- Sale of investments i.e. return from the investments.
- Premium on shares and debentures.
- Profit on purchase of an existing business.
You can say that capital reserve is the result of accumulating capital profits.
The capital reserve is created so that it can be used during inflation, business losses, business expansion, emergencies or overall you can say that company keeps this amount aside for the unexpectant future.
As it is created for emergency purposes, the capital reserve is a must-have element for every company to have.
The capital reserve is a capital reserved so you could see it in the balance sheet’s equity and liability side, under the heading of reserves and capital.
If you're looking for the capital reserve of any given company in its balance sheet, follow this sequence: Balance Sheet > Equity and Liabilities > Shareholder's equity > Reserves & Surplus
What is Reserve Capital?
Reserve capital is that part of subscribed capital that is not called up yet by the company.
Don’t get confused, we also know the reserve capital by the name of “Uncalled share capital”.
Let us understand through the diagram of ‘types of shares’ how the reserve capital is a part of subscribed capital:
Reserve capital does not have so much utilization as the capital reserve has; it is only used during the liquidation of the company i.e. during the winding up of the company, the company called up this capital from the shareholders.
Before the company creates reserve capital, a special resolution is passed at AGM (Annual general meeting) for determining that the specified portion of the company’s share capital will not be called up except when the company is about to wind up.
Reserve Capital Example
It is not such compulsion, like the rule for capital reserve, that company has to have the reserve capital. It is in the company’s hands whether it wants all the subscribed capital at once or in the installments.
If the company decides to collect all the subscribed share capital, during the public issue like IPO or FPO, from the shareholders then that company’s reserve capital would be zero but if the company decides to take the capital in installments and it wants 1/4th of the subscribed capital.
Then the remaining 3/4th capital which is uncalled will be known as the reserve capital of the company.
In our example, we know that issuing company that how much capital it called and how much is the uncalled or reserve capital but in reality, you couldn’t find this data of reserve capital.
Yeah! It is a fact that the company does not disclose its reserve capital.
Many people ask the question, “Is reserve capital shown in the balance sheet?” and the answer is NO.
What is the Difference Between Reserve Capital and Capital Reserve?
Capital Reserve | Reserve Capital |
It is created out of capital profits | It is created from subscribed share capital not yet called |
It is mandatory for a company to have capital reserve | Company can decide whether it needs reserve capital or not |
There are no any conditions for creating capital reserve | Companies need to pass a special resolution/permission to create reserve capital |
It is shown in the equity and liabilities' side of the balance sheet | It is not shown in the balance sheet |
Companies use capital reserves during inflation, business losses, and emergencies | Reserve capital is set aside for long-term projects in future, and liquidation event |
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