Understanding Capital Reserves vs. Revenue Reserves

In accounting, reserves are amounts set aside out of profits. Reserves can be broadly classified into two categories: Capital Reserves and Revenue Reserves.

What is a Capital Reserve?

A Capital Reserve is a reserve created out of capital profits. These profits are not earned from the ordinary business activities of the company. Capital reserves are generally not available for distribution as dividends.

Examples of sources for Capital Reserve include:

• Profit on sale of fixed assets
• Premium received on issue of shares or debentures
• Profit on revaluation of fixed assets
• Profit on redemption of debentures
• Profit prior to incorporation

From the options provided, Profit on sale of asset is an example of a capital profit, which is typically transferred to a Capital Reserve.

What is a Revenue Reserve?

A Revenue Reserve is a reserve created out of revenue profits. These are profits earned from the normal, day-to-day operations of the business. Revenue reserves can be freely used for distribution as dividends or for strengthening the financial position of the company.

Examples of Revenue Reserves include:

• General Reserve
• Dividend Equalization Reserve
• Contingency Reserve
• Workmen's Compensation Reserve
• Investment Fluctuation Reserve

From the options provided, both Contingency reserve and Dividend equalization reserve are examples of Revenue Reserves.

Identifying the Reserve That Is Not Capital

The question asks which of the given options is not an example of a Capital Reserve. Based on our understanding:

• Profit on sale of asset – This is a source of Capital Reserve.
• Contingency reserve – This is a Revenue Reserve.
• Dividend equalization reserve – This is a Revenue Reserve.

Both Contingency Reserve and Dividend Equalization Reserve are Revenue Reserves, meaning they are not Capital Reserves. Therefore, both options 2 and 3 fit the description of something that is not a Capital Reserve.

However, considering the options provided, including 'More than one of the above', and focusing on explaining the individual options:

Dividend equalization reserve is specifically created to smooth out dividend payments over years, using profits from good years to maintain dividends in lean years. This is a direct use of revenue profits and is a classic example of a Revenue Reserve.

Since Dividend equalization reserve is a Revenue Reserve, it is not a Capital Reserve.