Reserves - Capital(non distributable) and Revenue PDF

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Summary

“Explain the difference between revenue/distributable reserves and capital/non-distributable reserves, giving examples of each type of reserve.”“(Maximum word count: 300 words)”...

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“Explain the difference between revenue/distributable reserves and capital/non-distributable reserves, giving examples of each type of reserve.” “(Maximum word count: 300 words)” A revenue/distributable reserve is formed from the profits that had been accumulated by the company. These profits are as a result of the operations during a certain time period and are retained by the company with the intention of expanding the business in future. Revenue/distributable reserves are made up of company’s net profits therefore it is categorized as internal finance of the company. An example of revenue/distributable reserve can be taken by seeing the company, “Apple”. After the IPO of Apple, it kept all its profits as a revenue reserve for a couple of years. This enhanced the standing of the company due to strong financial health and helped it prosper in coming years. Whereas capital/non-distributable reserves are made up of the profits that are generated by the company from its non-operating activities, therefore it can’t be used to access the financial health of the company. These are retained by the company in order to write off the capital expenses of the company at a longer term or to finance a project in the future. It is a part of the equity section in the balance sheet of the company. It is the reserve that can also be used to act as a buffer for the company. An example of capital reserve can be that if a company has decided to build a new building for its office and they need capital for that. Instead of taking loans, they preserve a capital reserve for it. They can sell old building and land and transfer the money to this reserve which can be subsequently be used for their purpose....