Reserve

Definition of reserve

It is an amount set aside out of profits (i.e. from the profit and loss account or any surpluses) for unidentified or unspecified purposes.

Types of reserves

Reserves can be classified into the following major categories:

1. Revenue reserve
2. Capital reserve

Revenue reserve

Is a fund/amount created by voluntarily transferring part of the profit. It normally becomes part of the name of that reserve.

Types of revenue reserve

1. Specific reserves: These reserves created out of revenue profit for a specific purpose.
2. General reserve: These are reserves created out of revenue profit for general purposes.

Capital reserve

These are reserves which are created out of the capital profits. These reserves are not available for distribution among shareholders as dividend in the case of companies.

Examples or sources of capital reserve:

1. Profit on sale of fixed assets: it should be noted that capital profit is only excess of sale price over the cost of fixed asset.
2. Profit prior to incorporation.
3. Premium on issue of shares or debentures.
4. Profits on redemption of debentures.
5. Profit on forfeiture of shares.
6. Surplus on revaluation of fixed assets.
7. Amount transferred out of profits to capital.