General Reserve vs. Capital Reserve: What's the Difference?
Edited by Aimie Carlson || By Janet White || Published on January 17, 2024
General Reserve is created out of profits for meeting future unknown liabilities or expenses, while Capital Reserve is formed from capital profits not arising from normal business operations.
Key Differences
General reserves are formed from the profits earned from the company's usual business operations. Capital reserves are created from profits not directly related to the core business activities, such as profits from the sale of assets, revaluation of assets, or premiums received on the issuance of shares.
General reserves are primarily used to strengthen the company's financial position and support future growth or to offset future losses. Capital reserves are typically used for specific purposes like writing off capital losses, issuing bonus shares, or funding long-term projects.
General reserves offer more flexibility and can be used to pay dividends, though this is not a common practice. Capital reserves, on the other hand, are generally not available for dividend distribution.
General reserves are created more regularly, often annually, as a part of prudent financial management. Capital reserves are formed occasionally, depending on the occurrence of non-operating transactions that result in a profit.
The creation and use of general reserves are often subject to fewer restrictions compared to capital reserves. Capital reserves have specific guidelines and restrictions as per accounting standards and regulatory frameworks.
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Comparison Chart
Source of Formation
Profits from regular business operations
Profits from non-operating sources, like asset sales
Purpose and Use
Strengthen financial position, offset future losses
Specific purposes like writing off capital expenses
Flexibility in Usage
More flexible, can sometimes be used for dividends
Restricted, usually not used for dividends
Frequency of Creation
Created regularly
Created occasionally
Regulatory and Accounting
Subject to general financial management practices
Subject to specific accounting standards and regulations
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General Reserve and Capital Reserve Definitions
General Reserve
A fund for enhancing financial stability.
The general reserve contributed to the company's robust financial standing.
Capital Reserve
A non-distributable reserve under regulatory norms.
The capital reserve was not available for dividend distribution.
General Reserve
Reserve for future contingencies or expansion.
The general reserve was utilized for the company's expansion project.
Capital Reserve
A reserve formed from non-operational profits.
Profits from the sale of a factory were transferred to the capital reserve.
General Reserve
A part of retained earnings set aside for general purposes.
The board decided to transfer a portion of profits to the general reserve.
Capital Reserve
Fund created from capital profits like asset revaluation.
The increase in asset value was recognized in the capital reserve.
General Reserve
Financial provision for unknown liabilities.
The general reserve was used to cover unexpected financial liabilities.
Capital Reserve
Fund sourced from extraordinary gains or events.
Premiums on share issues were added to the capital reserve.
General Reserve
A financial buffer created from company profits.
The company allocated 10% of its annual profits to the general reserve.
Capital Reserve
Reserve for specific, often long-term, purposes.
The capital reserve was earmarked for funding major research projects.
FAQs
What is the main purpose of general reserves?
To strengthen the company’s financial position and provide for future growth or losses.
Are capital reserves distributable as dividends?
No, capital reserves are usually not available for dividend distribution.
Why are capital reserves created?
For specific purposes like funding long-term projects or writing off capital expenses.
What is a general reserve?
A financial reserve created from company profits for general future use.
Can general reserves be used for dividends?
Occasionally, but it's not a common practice.
Are capital reserves used for operational expenses?
Generally, no, they are reserved for specific, non-operational uses.
What constitutes a capital reserve?
A reserve formed from capital profits not arising from normal business operations.
How often are general reserves created?
Typically, they are created annually.
How does accounting treat general reserves?
As part of prudent financial management and retained earnings.
Are there restrictions on using capital reserves?
Yes, there are usually specific restrictions on their use.
What triggers the formation of capital reserves?
Non-operating transactions resulting in profit, like asset sales or revaluation.
Can general reserves cover operational losses?
Yes, they can be used to offset future operational losses.
What happens to general reserves in a merger?
They are often combined with the reserves of the merged entity.
Do shareholders have a say in how general reserves are used?
Shareholder approval may be needed for significant use of general reserves.
Do capital reserves impact company valuation?
Yes, they can positively impact the financial strength and valuation of a company.
Can capital reserves be invested?
They can be, but usually within the confines of regulatory guidelines and the specific purposes for which they were set aside.
What are the regulatory guidelines for capital reserves?
They are subject to specific accounting standards and regulations.
Is it mandatory to create general reserves?
It's a prudent practice but not legally mandatory.
Can capital reserves fund new ventures?
Yes, if aligned with the specific purpose for which they were created.
Can general reserves be created from borrowed funds?
No, they are typically created from earned profits.
About Author
Written by
Janet WhiteJanet White has been an esteemed writer and blogger for Difference Wiki. Holding a Master's degree in Science and Medical Journalism from the prestigious Boston University, she has consistently demonstrated her expertise and passion for her field. When she's not immersed in her work, Janet relishes her time exercising, delving into a good book, and cherishing moments with friends and family.
Edited by
Aimie CarlsonAimie Carlson, holding a master's degree in English literature, is a fervent English language enthusiast. She lends her writing talents to Difference Wiki, a prominent website that specializes in comparisons, offering readers insightful analyses that both captivate and inform.
