Which statement best differentiates revenue reserves and capital reserves?

Which statement best differentiates revenue reserves and capital reserves?

• A. Revenue reserves arise from profits and can be distributed; capital reserves arise from non-operating sources and are typically not distributable
• B. Capital reserves arise from profits and can be distributed
• C. Revenue reserves are only non-distributable
• D. Capital reserves are the same as revenue reserves

Answer: (A)

Revenue reserves are built from the profits earned by the business through its ordinary activities. Because they come from the earnings that could, in principle, be distributed as dividends, these reserves are tied to distributable profits and form part of shareholders’ funds that can be used for future distributions or other uses as the board dictates, within legal limits. Capital reserves, in contrast, come from capital-related or non-operating activities—such as share premium, profits on the sale of fixed assets, or asset revaluations. They are not sourced from the regular trading profits and are generally not available for distribution as dividends. Instead, they strengthen the company’s capital base and are used for capital purposes or specific permissible adjustments. So the distinguishing feature is the origin of the funds (operating profits versus capital/non-operating sources) and their typical distributability (revenue reserves are from profits and are typically not restricted from distribution in principle, while capital reserves are not distributable).

Revenue reserves are built from the profits earned by the business through its ordinary activities. Because they come from the earnings that could, in principle, be distributed as dividends, these reserves are tied to distributable profits and form part of shareholders’ funds that can be used for future distributions or other uses as the board dictates, within legal limits.

Capital reserves, in contrast, come from capital-related or non-operating activities—such as share premium, profits on the sale of fixed assets, or asset revaluations. They are not sourced from the regular trading profits and are generally not available for distribution as dividends. Instead, they strengthen the company’s capital base and are used for capital purposes or specific permissible adjustments.

So the distinguishing feature is the origin of the funds (operating profits versus capital/non-operating sources) and their typical distributability (revenue reserves are from profits and are typically not restricted from distribution in principle, while capital reserves are not distributable).