Question

Difference between capital account and reserve account in tabular form

Answer 1

Capital and reserve are terms used in financial accounting. They differ from each other in that reserves are typically created through a business' profits, while capital is typically created by investors' capital contributions of cash, property or something else representing wealth. Capital can also be created by a production surplus.

Overview

Reserve and capital are frequently confused because both are considered surplus funds. However, they differ because each is created differently. While capital and reserve represent accrued wealth that can be used as savings for a rainy day, the source of each is different. In business settings, capital is typically associated with investors, while reserves are created by several different sources.

Capital

Capital is often provided by lenders or investors in the form of cash for operating expenses, the purchase of goods and the production of goods. Capital can be any form of liquid medium that represents wealth. As such, it can be obtained through producing an excess -- or surplus -- over and above what is immediatley needed and saving it for later.

Reserve

A reserve is a form of equity that is created via several different sources. When reserves are created via shareholders' contributions, they are commonly in the form of a legal reserve fund or a share premium. Legal reserve funds are often required by legislation and must be paid out in the form of a certain percentage of share capital. Share premiums are amounts in excess of the nominal nalue of shares paid by shareholders. Reserves can also be created through profit--reatined earnings, in particular.

Considerations

Another difference between capital and reserve is that invested capital is typically used during the startup phase of a company, while reserve refers to wealth obtained through profitable operations after startup. Although both can be saved and used when needed, reserves are frequently considered as funds saved for the future. In other words, reserves are more commonly associated with the concept of rainy day funds.