In accounting (Also see What is the Purpose of Accounting?), reserves refer to the gains that a company allocates for specific purposes. Typically, companies will set up reserves for the procurement of fixed assets, to settle debts, to pay for repairs and maintenance as well as to pay bonuses to employees. After the company has decided on the types of reserves and their respective amounts, it needs to record them in the books of accounts and the financial statements. This is when it may need help from the accountants. If the business owners are unfamiliar with these accounting (Also see What are Provision and Accrual in Accounting?) procedures, they may choose to either employ an in-house accountant or hire an accounting firm in Singapore.
At the end of an accounting (Also see Things You Should Know About Accounting Estimates) period or a year, if a company has earned a profit, it may choose to retain part of the profit to prepare for the growth and development of the business or meet future demands. The sum of money that it keeps aside for this purpose is called reserves. Reserves would help a business in making sure that its financials are always in good condition. Also, the company can use the reserves to ensure that it can pay stable dividends to its shareholders. Some companies will expand their business or make investments by using the reserves.
Where are reserves in the financial statements (Also see What is a Financial Statement Review?) then? One would record reserves in the company’s balance sheet on the liability side under the “reserves and surplus” heading. In most cases, a company will not create reserves if it suffers a loss. Generally, there are three types of reserves, which are general reserves, specific reserves, as well as the revenue and capital reserves. In this article, we will look into the third type.
Business owners will create revenue reserves by using the gains that the company has earned from its business operations. This type of reserve will typically show up in the profit and loss appropriation account. While profit and loss account determines the net profit or loss of a company in a specific period, people would use profit and loss appropriation account to distribute net profit among partners, for the distribution of dividends, as well as to allocate reserves. Apart from distributing dividends, business owners can use the reserves to expand the business too.
For capital reserves, business owners would establish them by using capital profits but not the profits generated from the company’s business operations. Most of the time, they will not use capital reserves to distribute dividends to their shareholders. The premium that the company obtains from the issuance of shares and debentures is a type of capital reserve. Other examples include the gain acquired by selling the company’s fixed assets, capital redemption reserve, as well as the surplus after revaluing the assets and liabilities.