Types of Reserves

1. Capital Reserve
2. Revenue Reserve

1. Capital Reserve:

Capital reserves are those reserves, which are not created out of operating profit. In other words, these reserves are created out of capital profits. Profit on sale or revaluation on fixed assets is capital profit, which are generally not available for distribution among the shareholders of the company. The following are some examples of capital profits, which are the sources of creating capital profits which are the sources of creating capital reserves.

• Profit on sale of revaluation of fixed assets.
• Profit on repayment of debentures.
• Profit earned through the issue of shares at premium.
• Profit earned through forfeiture and re-issue of shares.
• Profit on the purchase of running business etc.

Utilization of Capital Reserves:

• To meet future capital losses
• To issue as fully paid bonus shares
• To strengthen the financial position of the business.