Question

Explain the need for account reserves. What do accountants create reserves for (be specific)? What purpose do reserves serve? How do reserves make a company's financial records more accurate?

Answer 1

All part of income generated not distributed as dividend among share holders. Some part of these are retained and further used in business. These part of profit retained in the business referred as reserves. These reserve may have future purpose or may not. Reserves gives the business a scope of expansion in future as share holders fund grow with increase in amount of Reserves. So instead of distributing more dividends and issuing further shares, retained earning is better way of investment.

Accountant create reserves for

1. General purpose- is non specific, may used in any purpose if required in future.

2. Capital Reserve- this reserve created out of surplus received on sale of asset, revaluing asset.

3. Statutory reserve- These type of reserve is created if some reserve creation is mandatory made by law.

4. foreign currency translation reserve- These reserves made for change of value of foreign currency at date of balance sheet. so that Value of foreign currency clearly affect the financial statement.

5. capital Redemption Reserve- Reserves created for future redeemable Capitals. like preference capital redemption reserve, debenture redemption reserve.

Reserves serve purposes like purchase of future Assets, redemption of capital, debentures,

Accounting of reserves make a company's financial statement more accurate as it divides the share holders fund into various portion. in simple. Share holders fund Excluding paid up share capital all are part of reserves. Stating these reserves separately purpose and usability of these reserves would be clearly known. some times organisation tkae disadvantage of Reserves do overstates the Balance sheet as it may increase both asset and liability part of balance sheet.