Revenue reserves and capital reserves differ mainly in their source of creation. A revenue reserve is created out of revenue profits arising from the normal operating activities of the business, which are available for dividend distribution. In contrast, a capital reserve is created primarily out of capital profits that do not arise from normal operations and are not available for distribution as dividends.

Regarding purpose and usage, revenue reserves are created to strengthen the financial position or meet unforeseen contingencies. A specific revenue reserve is used for earmarked purposes, while a general reserve can be used for dividends. However, a capital reserve is created to comply with legal requirements and is used only for specific purposes such as writing off capital losses or issuing bonus shares.