Q.Differentiate between 'Capital Reserve' and 'Reserve Capital'.
🔒You're viewing a preview — the full solution, concept, methods & PYQ mapping are locked.
🔒 Start your 14-day free trial to unlock the full solution →Part (a)Concept understanding — Capital Reserve Definition
Capital Reserve: The "Never-Say-Die" Profit
Think of a business like a person earning a salary. Most of that salary goes into daily expenses (rent, food, bills) — that's like Revenue Profit. But sometimes, you sell an old bike for ₹5,000 more than you expected. That's a one-time, unexpected gain. You wouldn't treat it as part of your regular monthly income, right? You'd probably put it aside for a rainy day.
That's the core idea of a Capital Reserve.
The Precise Meaning (NCERT Definition)
A Capital Reserve is a reserve that is created out of capital profits — profits that are not earned in the normal course of business. These are non-recurring gains.
Key sources of Capital Reserve (as per NCERT Class 12):
- Profit on sale of a fixed asset (e.g., selling an old machine for more than its book value)
- Profit on reissue of forfeited shares (the amount retained after reissuing shares that were earlier cancelled)
- Profit prior to incorporation (profit earned before the company was legally formed)
- Premium on issue of shares or debentures (the extra amount paid by investors above the face value — this is also a capital reserve, though sometimes shown separately as Securities Premium Reserve)
Capital Reserve is not available for distribution as dividends to shareholders. It is a "locked" reserve meant for specific purposes like writing off capital losses or issuing bonus shares.
Why It Matters
- Legal Requirement: The Companies Act restricts the use of capital profits. You cannot simply pay them out as dividends — that would be like selling your house and treating the money as your monthly salary. It's financially unsound.
- Financial Strength: A healthy capital reserve signals that the company has a cushion for unexpected capital losses or future expansion.
- Bonus Shares: Capital reserve is one of the sources from which a company can issue bonus shares (free shares to existing shareholders).
Accounting Treatment
When a capital profit arises, we credit the Capital Reserve account. The corresponding debit depends on the source.
Example 1: Profit on sale of a fixed asset
- Debit: Bank Account (with the sale proceeds)
- Credit: Asset Account (with the book value)
- Credit: Capital Reserve (with the profit)
Example 2: Profit on reissue of forfeited shares
- Debit: Share Forfeiture Account (with the amount transferred)
- Credit: Capital Reserve (with the profit)
Journal Entry (for profit on sale of asset):
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c Dr. | 1,00,000 | |||
| To Asset A/c | 70,000 | |||
| To Capital Reserve A/c | 30,000 | |||
| (Being profit on sale of asset transferred to capital reserve) |
Format in the Balance Sheet
In the Balance Sheet (under the head 'Shareholders' Funds'), Capital Reserve appears as a separate line item under Reserves and Surplus.
Format (as per NCERT Class 12): …
Part (b)Concept understanding — Share Capital Classification
Let’s start with something you already know. Imagine you and two friends decide to start a small business — say, a food truck. You each put in some money. That money is the capital of the business. It’s the foundation. Now, what if one friend puts in ₹50,000, another puts in ₹30,000, and you put in ₹20,000? You all own the business, but not equally. Your share of the business is proportional to the money you put in. That’s the basic idea behind Share Capital in a company — except a company can have thousands of owners (shareholders), and their ownership is divided into tiny, equal units called shares.
What is Share Capital Classification?
In a company, Share Capital is the total money raised by issuing shares. But not all shares are the same, and not all capital is treated the same way. The NCERT Class 12 Accountancy textbook classifies share capital into two main types from the company’s point of view:
- Equity Share Capital – The basic ownership capital. Equity shareholders are the real owners. They get dividends only if the company makes a profit, and they bear the highest risk.
- Preference Share Capital – A hybrid between equity and debt. Preference shareholders get a fixed dividend before equity shareholders, and if the company is wound up, they get their money back before equity shareholders. But they usually have no voting rights.
Within each, the capital is further classified on the Balance Sheet (the company’s financial position statement) into:
- Authorised Capital – The maximum amount of share capital a company is allowed to issue, as per its Memorandum of Association. Think of it as the legal ceiling.
- Issued Capital – The part of authorised capital that the company has actually offered to the public.
- Subscribed Capital – The part of issued capital that investors have agreed to take (i.e., applied for and been allotted).
- Called-up Capital – The portion of the face value of shares that the company has asked shareholders to pay.
- Paid-up Capital – The portion of called-up capital that shareholders have actually paid. (If some haven’t paid, that’s called “calls in arrears”.)
For a Class 12 exam, you are mostly dealing with Equity Share Capital and Preference Share Capital as the two main categories. The sub-classifications (Authorised, Issued, etc.) appear in the Balance Sheet format.
Why Does This Classification Matter?
Because it determines who gets what, when, and how much.
- Dividend priority: Preference shareholders get their fixed dividend first. Equity shareholders get whatever is left (if anything).
- Risk: Equity shareholders bear the business risk; preference shareholders have a safer, fixed return.
- Control: Equity shareholders vote; preference shareholders usually don’t.
- Accounting: The money received from issuing shares is not revenue — it’s capital. It goes into the Share Capital account on the liabilities side of the Balance Sheet. The company does not debit it as income.
Accounting Treatment: The Journal Entries
When a company issues shares, the accounting depends on whether the shares are issued at par (face value), at a premium (above face value), or at a discount (below face value — but this is now prohibited for equity shares in India). Let’s take the simplest case: issue at par.
Scenario: A company issues 10,000 equity shares of ₹10 each at par. The full amount is received on application.
Journal Entry:
| Date | Particulars | L.F. | Debit (₹) | Credit (₹) |
|---|---|---|---|---|
| Bank A/c (Dr.) | 1,00,000 | |||
| To Equity Share Capital A/c | 1,00,000 | |||
| (Being 10,000 equity shares of ₹10 each issued at par, fully paid) |
Explanation:
- Bank A/c is debited because the company receives cash (asset increases).
- Equity Share Capital A/c is credited because the company now owes this money to shareholders as capital (liability increases).
If shares are issued at a premium (say ₹12 per share, face value ₹10), the extra ₹2 goes to a separate account called Securities Premium Reserve A/c (credited). That reserve is not distributable as dividend — it’s a capital reserve.
Format: How Share Capital Appears in the Balance Sheet
As per the Companies Act, 2013, the Balance Sheet shows Share Capital under Equity and Liabilities. Here’s the relevant extract (simplified for Class 12):
Balance Sheet of XYZ Ltd. as at 31st March, 20XX (Extract)
| Particulars | Note No. | Amount (₹) |
|---|---|---|
| EQUITY AND LIABILITIES | ||
| 1. Shareholders’ Funds |
Part (a)
| Basis | Capital Reserve | Reserve Capital |
|---|---|---|
| Meaning | Reserve created out of capital profits | Part of uncalled share capital |
| Balance Sheet | Shown under Reserves & Surplus | Not shown (disclosed in notes) |
Part (a): Capital Reserve = reserve from capital profits (in Balance Sheet); Reserve Capital = uncalled capital callable only on winding up.
Part (b): Preference shares carry preferential rights to a fixed dividend and to repayment of capital.
Part (a)
Capital Reserve is created out of capital profits (e.g. profit on forfeiture of shares, premium on issue of shares/debentures, profit prior to incorporation). It appears on the liabilities side under Reserves & Surplus and is used only for capital purposes (writing off capital losses, issuing bonus shares). …
Showing the 12 most recent of 96 on this concept.
- CBSE 2026Set 67/4/11 markMCQQ.A portion of the uncalled capital reserved by a company to be called only in the event of winding up of the company is called : (A) Subscribed but not fully paid capital (B) Unissued capital (C) Subscribed capital (D) Reserve capital
›Reveal solutionSolution
The portion of uncalled capital that a company reserves to be called only upon its winding up is known as Reserve Capital.
In company accounting, understanding the different categories of share capital is fundamental. The question asks to identify a specific type of capital that has a unique restriction on when it can be called up. This restriction is crucial for the protection of creditors, ensuring there's a pool of funds available if the company faces liquidation.
Let's break down the concept:
Reserve Capital
Reserve Capital refers to a portion of a company's uncalled share capital that the company, by passing a special resolution, decides not to call up except in the event of its winding up. This means that this specific portion of capital cannot be demanded from shareholders during the normal course of business operations, even if the company faces financial difficulties. Its sole purpose is to provide a safety net for creditors during liquidation.
Why is it treated this way?
The creation of Reserve Capital is a strategic decision by the company to enhance the confidence of its creditors. By earmarking a portion of capital exclusively for winding-up scenarios, the company assures creditors that there will be additional funds available to settle their claims if the business ceases to operate. This capital cannot be mortgaged or charged, further safeguarding its availability for creditors. It is important to note that Reserve Capital is not disclosed in the company's Balance Sheet because it represents capital that has not yet been called up.
Distinguishing from other options:
- (A) Subscribed but not fully paid capital: This refers to the portion of capital that shareholders have agreed to buy (subscribed) but for which the company has not yet demanded the full payment (not fully paid). This uncalled portion can be called up by the company at any time during its normal operations, unlike Reserve Capital.
- (B) Unissued capital: This is the portion of the company's authorized capital that has not yet been offered to the public for subscription. It's capital that the company is permitted to issue but hasn't yet. Reserve Capital, on the other hand, is a part of the subscribed capital that remains uncalled. …
- CBSE 2026Set MARCH1 markMCQQ.Issued capital is a part of :(a) a) Reserve capital(b) b) Unissued capital(c) c) Authorised capital(d) d) Subscribed capital
›Reveal solutionSolution
Issued capital is a portion of the authorised (registered) capital, so the answer is (c) Authorised capital.
Share capital is classified as authorised -> issued -> subscribed -> called-up -> paid-up. Authorised capital is the maximum amount stated in the memorandum. The company need not issue all of it at once; the part it actually offers for public subscription is the issued capital, and the balance is unissued capital. So issued capital is always a part of the …
- CBSE 2026Set MARCH1 markQ.State any one type of shares.
›Reveal solutionSolution
One type of share is the Equity Share (the other being the Preference Share).
Under the Companies Act, a company can issue two broad classes of shares:
…
- CBSE 2026Set ANNUAL1 markQ.Write the types of preference shares. (any four)
›Reveal solutionSolution
Four types of preference shares are cumulative, non-cumulative, participating and non-participating.
Preference shares carry a preferential right to dividend and to repayment of capital, and are classified according to the rights attached:
- Cumulative vs Non-cumulative - whether unpaid dividends accumulate.
- Participating vs Non-participating - whether they share in surplus profits beyond the fixed rate.
- Convertible vs Non-convertible - whether they can be converted into equity shares. …
- CBSE 2026Set ANNUAL1 markQ.State whether True or False: Shares are of two types.
›Reveal solutionSolution
The statement is True.
As per the Companies Act, 2013, a company's share capital is divided into two kinds of shares - equity shares and preference shares. So …
- CBSE 2026Set ANNUAL1 markMCQQ.The capital with which a company is registered, is called:(a) Authorized Capital(b) Issued Capital(c) Subscribed Capital(d) Paid-up Capital(a) Authorized Capital(b) Issued Capital(c) Subscribed Capital(d) Paid-up Capital
›Reveal solutionSolution
The capital with which a company is registered is its Authorized Capital.
Share capital of a company is classified into several categories as it moves from registration to actual cash received:
- Authorized Capital — the maximum amount of share capital a company is legally allowed to raise, as stated in its Memorandum of Association (Capital Clause). This is the capital 'with which the company is registered.' It can only be increased by following the procedure laid down in the Companies Act, 2013 (special resolution + approval).
- Issued Capital — that part of the authorized capital which the company actually offers to the public/investors for subscription.
- Subscribed Capital — that part of the issued capital which has actually been subscribed/applied for and allotted to investors. …
- CBSE 2026Set ANNUAL1 markMCQQ.What correct order of capitals is followed while preparing Notes to Account to find out the amount of share capital to be shown in Balance Sheet _______.(a) Issued capital, Authorised capital, Subscribed capital(b) Subscribed capital, Issued capital, Authorised capital(c) Authorised capital, Issued capital, Subscribed capital(d) Authorised capital, Subcribed capital, Issued capital(a) Issued capital, Authorised capital, Subscribed capital(b) Subscribed capital, Issued capital, Authorised capital(c) Authorised capital, Issued capital, Subscribed capital(d) Authorised capital, Subcribed capital, Issued capital
›Reveal solutionSolution
The correct order is Authorised capital → Issued capital → Subscribed capital (Option C).
Share capital is disclosed in the Notes to Accounts in a logical, descending sequence of scope:
Step Term Meaning 1 Authorised Capital The maximum capital a company is permitted to raise, as stated in its Memorandum of Association. 2 Issued Capital The part of the authorised capital that the company actually offers for subscription to the public/promoters. 3 Subscribed Capital The part of the issued capital that has actually been taken up (applied for and allotted) by the public. … - CBSE 2026Set ANNUAL1 markMCQQ.The part of authorized capital which is offered to the public is called(a) subscribed capital(b) nominal capital(c) authorized capital(d) issued capital
›Reveal solutionSolution
"Issued Capital" is the specific portion of a company's Authorised Capital that is actually offered to the public/investors for subscription.
Share capital in company accounts moves through several well-defined stages:
- Authorised (Nominal/Registered) Capital — the maximum amount of capital a company is permitted to raise, as stated in its Memorandum of Association. This is a ceiling, not an actual issue.
- Issued Capital — the part of the authorised capital that the company actually offers for subscription to the public/investors. It can never exceed authorised capital.
- Subscribed Capital — the part of the issued capital that has actually been subscribed (applied and allotted) by the public.
- Called-up Capital — the part of subscribed capital that the company has demanded (called) from shareholders so far. …
- CBSE 2026Set ANNUAL1 markMCQQ.The Part of Authorised capital offered by the company to the public for subscription is ............................... .(a) Subscribed Capital(b) Issued Capital(c) Called up Capital(d) Paid up Capital
›Reveal solutionSolution
The part of Authorised Capital offered to the public for subscription is called Issued Capital.
A company's share capital, as taught under "Accounting for Share Capital," has several layers, each a narrower slice of the one before:
- Authorised (Nominal/Registered) Capital — the maximum capital a company is permitted to raise, as stated in its Memorandum of Association.
- Issued Capital — the part of the Authorised Capital that the company actually offers to the public (or to specific persons) for subscription. It is always ≤ Authorised Capital.
- Subscribed Capital — the part of the Issued Capital that is actually applied for and allotted to applicants.
- Called-up Capital — the part of the Subscribed Capital that the company has demanded (called) from shareholders so far. …
- CBSE 2026Set ANNUAL1 markQ.When the purchase price of a business is less than the net assets acquired, then which account is credited for the difference ?
›Reveal solutionSolution
If Purchase Consideration < Net Assets Acquired, the difference (a capital profit) is credited to Capital Reserve.
When a company takes over a running business (or purchases a bundle of assets and liabilities) and settles a Purchase Consideration, the accounting treatment of the difference between the Purchase Consideration and the Net Assets Acquired (Assets taken over − Liabilities taken over) depends on which is higher:
- If Purchase Consideration > Net Assets Acquired: the excess is Goodwill (a capital LOSS of sorts — paying more than the net worth of what was acquired), debited to Goodwill Account. …
- CBSE 2025Set MARCH1 markMCQQ.Which of the following is not shown under the heading 'Share capital' in a balance sheet?(a) Authorised capital(b) Issued capital(c) Reserve capital(d) Subscribed capital
›Reveal solutionSolution
Authorised, issued and subscribed capital are all shown under 'Share Capital'; reserve capital is not disclosed there. Correct option: (c).
In GSEB Class-12 Commerce Accountancy (Share Capital):
- Reserve capital = the portion of uncalled capital that a company resolves to call only at the time of winding up. …
- CBSE 2025Set ANNUAL1 markMCQQ.Sweat equity shares are issued to (A) Employees (B) Directors (C) Both (A) and (B) (D) None of them
›Reveal solutionSolution
Sweat equity shares are issued to employees and directors, so the answer is (C).
Sweat equity shares are equity shares issued by a company to its employees or directors at a discount, or for consideration other than cash, in recognition of their know-how, intellectual property or value additions to the company.
- They reward contribution, so both employees (A) and directors (B) can receive them. …
🎓Unlock everything free for 14 days
- ✓Full step-by-step solutions
- ✓Concept-first explanations
- ✓Methods, shortcuts & mistakes
- ✓PYQ mapping + timed mock tests
Full access for 14 days. No credit card required.