Question

Name and explain different types of reserves in details

Answer 1

Types of Reserves:

1. Revenue Reserve: It is an amount set aside out of revenue profits for distribution of dividends.

For example, general reserve, investment fluctuation fund, capital reserve and workmen compensation fund.

It is not a charge against profit but it is appropriation of profit shown in the profit and loss account.

It is beneficial for the smooth function of the business.

The retention of profit in the form of reserves reduces the amount of profit to distribute among the business owners.

This is further classified into general reserve and specific reserve.

1. General reserve means a reserve which is not maintained for specific purpose.

It helps to strengthen the financial status of the business. It is also known as free reserve and contingency reserve.

2. Specific reserve means a reserve which is maintained for specific purpose.

For example, dividend equalisation reserve is created to maintain dividend rate.

This reserve amount is utilised to maintain the rate dividend in the year of low profit.

Likewise, the workmen compensation fund is maintained to provide claims of the workers, investment fluctuation fund is used at times of decline in the value of investment and debenture redemption reserve is used to provide funds for redemption of debentures.

2. Capital Reserve: It is an amount set aside out of capital profits which is not available for distribution as dividend among the shareholders.

It is used for writing capital losses/issue of bonus share in a company.

Examples of capital reserves are

• Profit prior to incorporation
• Premium on issue of shares or debentures
• Profit on redemption of debenture
• Profit on forfeiture of share
• Profit on sale of fixed assets
• Capital redemption reserve
• Profit on revaluation of fixed assets and liabilities