Reserves in Accounting: Capital vs. Revenue

Steps:

• Statement 1: Capital reserves arise from non-trading sources like share premiums or asset revaluations, not normal trading.
• Statement 2: Capital reserves are non-distributable and cannot fund dividends to protect capital base.
• Statement 3: Revenue reserves, from trading profits, can finance bonus shares by capitalizing undistributed earnings.
• Statement 4: Revenue reserves consist of accumulated profits generated (raised) from business operations.

Why C is correct:

• C selects 3 and 4, aligning with accounting standards (e.g., IAS 1) where revenue reserves support bonus issues and represent retained operational profits.

Why the others are wrong:

• A: 1 and 2 false; capital reserves exclude trading activities and dividends.
• B: 2 false; capital reserves are restricted from dividend payments.
• D: Misses 3; revenue reserves also enable bonus share issuance.

Final answer: C