Capital Reserves in Accounting

Steps:

• Recall that capital reserves arise from non-operating sources like capital transactions and cannot be distributed as dividends.
• Evaluate option 1: Debentures represent long-term borrowings, classified as liabilities, not reserves.
• Evaluate option 2: Retained earnings accumulate from profits, forming revenue reserves available for dividends.
• Evaluate options 3 and 4: Share premium reserve comes from issuing shares above par value; revaluation reserve from asset revaluations—both are capital reserves.

Why C is correct:

• Under accounting standards (e.g., IAS 1), share premium and revaluation reserves are non-distributable capital reserves from capital gains, not trading profits.

Why the others are wrong:

• A includes debentures (a liability) and retained earnings (a revenue reserve).
• B selects only debentures, which is not a reserve at all.
• D omits share premium reserve, another key capital reserve.

Final answer: C