Depreciation, Provisions and Reserves

purposes as provided in the law in force, e.g. to write off capital losses or issue of bonus shares. Basis of Difference Revenue Reserve Capital Reserve . Source of creation It is created out of revenue It is created primarily out of profits which arise out of capital profit which do not arise normal operating activities out of the normal operating of the business and are activities of the business and not otherwise available for available for dividend distribution.

dividend distribution. But revenue profits may also be used for this purpose. . Purpose It is created to strengthen It is created for compliance of the financial position, to legal requirements or accounting meet unforeseen practices.

contingencies or for some specific purposes. . Usage A specific revenue reserve It can be utilised for specific can be utilised only for the purposes as provided in the law earmarked purpose while a in force e.g. to write off capital general reserve can be losses or issue of bonus shares.

utilised for any purpose including distribution of dividend. Fig. . : Difference between capital reserve and revenue reserve A business firm may consider it proper to set up some mechanism to protect