What are reserves in financial statements?

The amount which is kept aside from profits to strengthen financial position of a firm. It is also called retained earnings. Reserves are used buy new assets, pay bonuses, spent for repairs and maintenance, pay off debt etc.

They can also use for dividend payments, to meet contingencies, legal requirements, investing etc.

Types of reserves are as follows −

  • Capital reserves − Capital revenue created from capital profits. It has no effect on net profit and they are not available for distribution.

    • Profit on sale of fixed asset.
    • Premium charged on issue of debenture/capital share capital.
    • Increase value of asset by revaluation.
    • Gain on redemption of debenture.
  • Revenue reserves − Revenue reserves are created from profits of operations of a firm. It has no effect on net profit. It reduces profit of shares among shareholders, partners or owner. It is also called as undistributed profits or retained profits.

    • Strengthen financial position.
    • Part of owners’ capital.
    • Additional working capital.
    • Can make for general purposes.

Types of reserves are as follows −

  • Legal reserve fund.
  • Securities premium.
  • Remuneration reserve.
  • Translation reserve.
  • Hedging reserve.

Some of the advantages are mentioned below −

  • Improves financial stability.
  • Business expansion.

Some of the disadvantages are given below −

  • Funds utilisation.
  • Real financial position is not known.

Journal entry

Profit & Loss A/cXXXX
General reserves

Updated on: 14-Aug-2020


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