Which of the following is a capital receipt ? (A) Subscriptions (B) Sale of used sports material (C) Endowment

Question

Q. Which of the following is a capital receipt ? (A) Subscriptions (B) Sale of used sports material (C) Endowment fund (D) Entrance fees

CBSECBSE Class XII Board 2020MCQ· 1mImportance★★★★★

✓ Free question

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)

Important

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):

Particulars	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):

Particulars	Note No.	Amount (₹)
EQUITY AND LIABILITIES
1. Shareholders' Funds
(a) Share Capital	1	XXXX
(b) Reserves and Surplus	2	XXXX
2. Non-Current Liabilities
3. Current Liabilities
TOTAL		XXXX

Note 2: Reserves and Surplus

Particulars	Amount (₹)
Capital Reserve	30,000
Securities Premium Reserve	50,000
General Reserve	1,00,000
Surplus (Balance in Statement of Profit & Loss)	20,000
Total	2,00,000

Watch out

A common mistake: Students often confuse Capital Reserve with General Reserve. General Reserve is created out of revenue profits (normal business earnings) and can be distributed as dividends. Capital Reserve is created out of capital profits and cannot be distributed as dividends.

The Bottom Line

Capital Reserve = One-time, non-operating profit that stays locked in the business.

It's the business equivalent of that unexpected bonus you got — you don't spend it on daily groceries; you save it for something special. In accounting, that "saving" is the Capital Reserve account, credited when the profit arises and debited only when used for its permitted purposes (like writing off a capital loss or issuing bonus shares).

Endowment Fund is the capital receipt among the four options, since it is received to be preserved as a fund, not consumed as regular income.

Checking each option:

Option	Item	Capital or Revenue Receipt?
(A)	Subscriptions	Revenue receipt — regular annual income from members
(B)	Sale of used sports material	Revenue receipt — sale of a consumable/minor item, treated as ordinary income
(C)	Endowment fund	Capital receipt — a fund given with the condition that the principal is preserved and only its income is used; added directly to the Capital Fund / shown as a separate fund in the Balance Sheet
(D)	Entrance fees	Revenue receipt — treated as regular income of the year, in the absence of any instruction to capitalise it

✓Final answer

(C) Endowment fund is the capital receipt.

Same / Similar Concept — real previous-year questions on the same or a closely similar concept, not this exact question.

Showing the 12 most recent of 14 on this concept.

CBSE 2026Set 67/4/11 markMCQ
$Q. A portion of the uncalled capital reserved by a company to be called only in the event of winding up of the company is called : (A) Subscribed but not fully paid capital (B) Unissued capital (C) Subscribed capital (D) Reserve capital$
›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.

(C) Subscribed capital: This is the total nominal value of shares that have been subscribed for by the public. It can be fully paid or not fully paid. Reserve Capital is a specific portion of the uncalled part of subscribed capital, with a special restriction.

Watch out

Do not confuse Reserve Capital with Capital Reserve.

Reserve Capital is a portion of uncalled share capital that can only be called upon winding up. It is not shown in the Balance Sheet.

Capital Reserve is a reserve created out of capital profits (e.g., premium on issue of shares, profit on sale of fixed assets, profit on forfeiture of shares). It is shown in the Balance Sheet under "Reserves and Surplus" and can be used for specific purposes like writing off capital losses or issuing bonus shares.

The definition provided in the question perfectly matches the characteristics of Reserve Capital.

The Solution

Based on the definitions and distinctions:

The description "A portion of the uncalled capital reserved by a company to be called only in the event of winding up of the company" precisely defines Reserve capital.

✓Final answer
$The correct option is (D) Reserve capital .$
CBSE 2026Set ANNUAL1 mark
$Q. When the purchase price of a business is less than the net assets acquired, then which account is credited for the difference ?$
›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.

If Purchase Consideration < Net Assets Acquired: the company has effectively acquired net assets worth MORE than what it paid — a bargain purchase. This excess (a capital gain, not a trading profit) is credited to Capital Reserve Account, since it did not arise from the normal trading operations of the business and is not available for distribution as dividend in the ordinary course.

Journal entry (when PC < Net Assets):

Sundry Assets A/c Dr. (individual assets at agreed values)

   To Sundry Liabilities A/c

   To Vendor's A/c (Purchase Consideration)

   To Capital Reserve A/c (balancing figure — the difference)

✓Final answer
$Capital Reserve Account is credited with the difference when the purchase price is less than the net assets acquired.$
CBSE 2024Set 67/1/11 markMCQ
$Q. Reserve capital is that part of _________ capital which cannot be called except at the time of winding up of the company. (A) Issued (B) Called up (C) Uncalled (D) Nominal$
›Reveal solutionSolution
Reserve capital is a specific portion of a company's uncalled share capital that can only be called upon during the company's winding up.

Let's understand the different categories of share capital to correctly identify what reserve capital is. A company's capital structure is typically divided as follows:

Authorised Capital (or Nominal Capital): This is the maximum amount of share capital that a company is legally permitted to issue to its shareholders, as stated in its Memorandum of Association.

Issued Capital: This is the part of the authorised capital that the company has offered to the public for subscription.

Subscribed Capital: This is the part of the issued capital that has actually been subscribed (applied for and allotted) by the public.

Called-up Capital: This is the portion of the subscribed capital that the company has demanded from its shareholders.

Uncalled Capital: This is the portion of the subscribed capital that the company has not yet demanded from its shareholders.

Paid-up Capital: This is the portion of the called-up capital that shareholders have actually paid to the company.

Reserve Capital is a special concept related to the uncalled capital. According to Section 65 of the Companies Act, 2013, a company may, by special resolution, determine that any portion of its uncalled share capital shall not be capable of being called up except in the event and for the purpose of the company being wound up. This specific portion is known as Reserve Capital.

The primary purpose of creating Reserve Capital is to provide an additional layer of security to the company's creditors. In the event of liquidation, this capital can be called upon to settle the company's debts. It cannot be used for any other purpose, nor can it be charged as security for loans.

Watch out

Do not confuse Reserve Capital with Capital Reserve. Capital Reserve is a part of a company's reserves and surplus, created out of capital profits (e.g., profit on sale of fixed assets, premium on issue of shares), and is shown on the liabilities side of the balance sheet. Reserve Capital, on the other hand, is a part of the uncalled share capital and does not appear in the balance sheet as a separate item, though its existence is disclosed in the notes to accounts.

Based on this understanding, reserve capital is clearly a part of the capital that has not yet been called up by the company.

Working Note 1: Analysis of Options

(A) Issued Capital: Reserve capital is not the entire issued capital, but a specific part of the uncalled portion of the subscribed capital (which is part of issued capital).

(B) Called up Capital: This is incorrect. Reserve capital is explicitly not called up until winding up.

(C) Uncalled Capital: This aligns perfectly with the definition. Reserve capital is a designated portion of the capital that the company has not yet demanded from its shareholders.

(D) Nominal Capital: While reserve capital is ultimately derived from within the limits of nominal capital, it is a more specific classification of the uncalled portion, not the entire nominal capital.

Therefore, the most accurate option is (C) Uncalled.

✓Final answer
$Reserve capital is that part of Uncalled capital which cannot be called except at the time of winding up of the company. The correct option is (C) .$
CBSE 2024Set ANNUAL1 mark
$Q. Answer in one word/sentence: Capital Reserve is created out of which type of profit?$
›Reveal solutionSolution

Answer: Capital profit.

Capital Reserve is created out of capital profits - gains such as profit on sale of fixed assets, profit on re-issue of forfeited shares, or premium on issue of shares/debentures - and not from normal revenue (trading) profits. It is not available for distribution as dividend.

✓Final answer
$Capital profit.$
CBSE 2023Set 67/3/11 markMCQ
$Q. Which of the following statements is true for 'Reserve Capital' ? (A) It is a portion of the uncalled capital to be called only in the event of winding up of the company. (B) It is a part of the subscribed capital which has been called-up on the shares. (C) It is that portion of the called-up capital which has been actually received from the shareholders. (D) It is that part of the authorised capital that is actually issued to the public for subscription.$
›Reveal solutionSolution
Reserve Capital is a portion of the uncalled capital that a company decides, by a special resolution, to call only in the event of winding up. Therefore, option (A) is correct.

This question tests your understanding of a specific term under the Companies Act. The key is to distinguish between called-up capital, paid-up capital, subscribed capital, and reserve capital. Reserve capital is not part of the called-up or paid-up amounts — it is deliberately kept as a safety net.

Concept and Treatment

Under the Companies Act, 2013, a company may, by a special resolution, decide that a portion of its uncalled capital shall not be called up except in the event of the company being wound up. This portion is called Reserve Capital. It is also known as Reserve Liability.

The purpose is to strengthen the company’s financial position and assure creditors that there is a reserve of uncalled capital available if the company is liquidated. Until winding up, the company cannot demand this amount from shareholders.

Now, let’s evaluate each option:

Option (A): "It is a portion of the uncalled capital to be called only in the event of winding up of the company."

This matches the definition exactly. Reserve capital is part of uncalled capital, and it can only be called when the company winds up.

Option (B): "It is a part of the subscribed capital which has been called-up on the shares."

This is incorrect. Called-up capital is the amount the company has already demanded from shareholders. Reserve capital is specifically not called up until winding up.

Option (C): "It is that portion of the called-up capital which has been actually received from the shareholders."

This describes paid-up capital, not reserve capital.

Option (D): "It is that part of the authorised capital that is actually issued to the public for subscription."

This describes issued capital, not reserve capital.

Watch out

A common mistake is to confuse Reserve Capital with Capital Reserve. Capital Reserve arises from capital profits (e.g., share premium, revaluation surplus) and appears on the liabilities side of the Balance Sheet. Reserve Capital is a part of uncalled capital and is not a reserve in the usual accounting sense — it is a restriction on calling up capital.

Tip

Remember: Reserve Capital = Uncalled Capital that is reserved for winding up. It is never shown as a separate item in the Balance Sheet — it is simply disclosed in the notes to accounts as part of the subscribed capital.

✓Final answer
$The correct statement is (A) : Reserve Capital is a portion of the uncalled capital to be called only in the event of winding up of the company.$
CBSE 2023Set ANNUAL1 markMCQ
$Q. Profit on cancellation of own debenture is transferred to (A) Profit and Loss A/c (B) Capital Reserve A/c (C) Reserve A/c (D) Premium$
›Reveal solutionSolution

Profit on cancellation (redemption by purchase in the open market) of own debentures is a capital profit, transferred to Capital Reserve A/c.

When a company purchases its own debentures from the market at a price lower than their nominal (face) value and cancels them, the difference is a gain. Because this gain arises from a capital transaction (dealing in the company's own securities) rather than from trading, it is not available for distribution as dividend and is transferred to the Capital Reserve Account. The entry is: Own Debentures A/c (or Profit on Cancellation) ... To Capital Reserve A/c. So the correct answer is Capital Reserve.

✓Final answer
$(B) Capital Reserve A/c$
CBSE 2023Set ANNUAL1 markMCQ
$Q. Capital reserve is created out of (A) Profit of revaluation (B) Profit on sale of assets (C) Profit on purchase of business (D) All of these$
›Reveal solutionSolution
Capital reserve arises from capital profits — profit on revaluation, profit on sale of fixed assets and profit on purchase of a business — so 'All of these' is correct.

A capital reserve is created out of capital profits (profits not earned in the ordinary course of trading), which include:

Profit on revaluation of assets and liabilities.

Profit on sale of fixed assets.

Profit on purchase of a business (capital reserve on acquisition).

It is not created out of normal revenue/operating profit, and it is generally not available for distribution as cash dividend. As all three listed sources are capital profits, (D) is correct.

✓Final answer
$(D) All of these.$
CBSE 2023Set ANNUAL1 mark
$Q. State whether True or False: Capital Reserves are created from Capital Profits.$
›Reveal solutionSolution

The statement is True.

Capital Reserve is created out of capital profits - profits not earned in the normal course of business (e.g. profit on sale of fixed assets, profit on re-issue of forfeited shares, premium on issue). So the statement is true.

✓Final answer
$True.$
CBSE 2022Set ANNUAL1 mark
$Q. What is capital reserve?$
›Reveal solutionSolution

Capital Reserve is a reserve built from capital (non-trading) profits.

Capital Reserve is a reserve created out of capital profits — profits that do not arise from the normal trading/operating activities of the business, such as profit on reissue of forfeited shares, profit on sale of fixed assets, or premium received on redemption. Since these profits are not 'earned' through the regular business operations, they are not available for distribution to shareholders as dividend. Instead, they are kept aside as Capital Reserve and typically used for purposes such as writing off capital losses or issuing bonus shares.

✓Final answer
$Capital Reserve is a reserve created out of capital profits, used for purposes like writing off capital losses or issuing bonus shares — not available for dividend.$
CBSE 2022Set ANNUAL1 markMCQ
$Q. Capital reserve is formed if shares are ______.$
(a) issued
(b) forfeited
(c) forfeited and reissued
(d) All of these
›Reveal solutionSolution

The profit earned on reissuing forfeited shares (after adjusting any loss on reissue) is transferred to Capital Reserve.

Merely issuing shares (at par or premium) does not by itself create a capital reserve — premium received goes to the Securities Premium Account, not Capital Reserve. Similarly, forfeiture alone (cancelling a defaulting shareholder's shares) only creates a balance in the Forfeited Shares Account; it becomes a capital reserve only after the shares are reissued. On reissue, any loss on reissue is first adjusted against the amount forfeited, and whatever surplus remains in the Forfeited Shares Account after that adjustment — representing a genuine capital profit — is transferred to the Capital Reserve. So the complete two-step event, forfeiture and reissue, is what gives rise to the capital reserve.

✓Final answer
$The correct option is forfeited and reissued .$
CBSE 2022Set ANNUAL1 markMCQ
$Q. Capital Reserve is utilised to meet ______.$
(a) capital losses
(b) capital gain
(c) unforseen events
(d) short term purpose
›Reveal solutionSolution

Capital Reserve, being a capital-nature reserve, can only be used to meet capital losses, never to pay dividends or cover trading losses.

A Capital Reserve is created out of capital profits — profit on reissue of forfeited shares, profit on sale of fixed assets, premium on redemption received in certain cases, profit prior to incorporation, and the like. Because its source is capital (not trading) in nature, the law restricts how it may be used: it can be utilised to write off capital losses such as a loss on sale/discard of a fixed asset, to write off preliminary expenses or discount on the issue of shares/debentures, or (subject to conditions) to issue bonus shares. It cannot be distributed as dividend and is not meant for short-term or unforeseen day-to-day purposes — those are met from the general Revenue Reserve instead.

✓Final answer
$The correct option is capital losses .$
CBSE 2020Set 67/1/11 markMCQ
$Q. Which of the following statements does not relate to 'Reserve Capital' : (A) It is part of uncalled capital of a company. (B) It cannot be used during the lifetime of a company. (C) It can be used for writing off capital losses. (D) It is part of subscribed capital.$
›Reveal solutionSolution
Statement (C) does not relate to Reserve Capital — Reserve Capital can be called up only on winding-up, not during the company's lifetime to write off capital losses.

Concept: Reserve Capital

When a company issues shares, it may choose not to call the entire face value immediately. The portion not yet demanded is Uncalled Capital. Out of this uncalled capital, a company may, by passing a special resolution, earmark a portion that will not be called up except in the event of the company being wound up. This earmarked portion is Reserve Capital.

Reserve Capital is a statutory safeguard for creditors. Section 99 of the Companies Act, 2013 permits a limited company to determine by special resolution that any portion of its share capital which has not been already called up shall not be capable of being called up except in the event and for the purposes of the company being wound up. Once created, this reserve cannot be altered or cancelled except by an order of the Tribunal.

Key Characteristics of Reserve Capital

Part of Uncalled Capital: Reserve Capital is carved out of the uncalled portion of subscribed capital. It remains uncalled during the normal life of the company.

Cannot be used during the company's lifetime: By definition, Reserve Capital can be called up only when the company is being wound up. It is not available for any purpose — paying dividends, meeting losses, or writing off capital losses — while the company is a going concern.

Part of Subscribed Capital: Since Reserve Capital is a portion of the share capital that shareholders have agreed to subscribe (but which has not been called), it forms part of the subscribed capital of the company.

Available only on winding-up: The sole purpose is to provide an additional cushion to creditors at the time of liquidation.

Analysis of Each Statement

(A) It is part of uncalled capital of a company.

This is correct. Reserve Capital is a portion of the uncalled capital that the company has resolved not to call except on winding-up.

(B) It cannot be used during the lifetime of a company.

This is correct. Reserve Capital is ring-fenced and can be called up only when the company is being wound up, not during its normal operations.

(C) It can be used for writing off capital losses.

This is incorrect. Reserve Capital cannot be called or utilised during the company's lifetime for any purpose, including writing off capital losses. Capital losses (e.g., preliminary expenses, discount on issue of shares/debentures) are typically written off against Capital Reserve or Securities Premium or profits, but never against Reserve Capital, which remains untouched until liquidation.

(D) It is part of subscribed capital.

This is correct. Reserve Capital is a portion of the subscribed capital (the capital that shareholders have agreed to take up) that has not been called and is reserved for winding-up.

Watch out

Students often confuse Reserve Capital with Capital Reserve. Capital Reserve is an actual reserve (a surplus) that can be used for specific purposes like writing off capital losses or issuing bonus shares. Reserve Capital, on the other hand, is not a reserve at all — it is uncalled share capital held in reserve for creditors on liquidation.

✓Final answer
$Statement (C) does not relate to Reserve Capital. Reserve Capital can be called up only on winding-up of the company and cannot be used during the company's lifetime for writing off capital losses or any other purpose.$

Q.Which of the following is a capital receipt ? (A) Subscriptions (B) Sale of used sports material (C) Endowment fund (D) Entrance fees

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