Reserve (accounting)

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In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. In nonprofit accounting, an "operating reserve" is commonly used to refer to unrestricted cash on hand availabto sustain an organization, and nonprofit boards usually specify a target of maintaining several months of operating cash or a percentage of their annual income, called an Operating Reserve Ratio. [1]

Sometimes, reserve is used in the sense of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting Standards Board. For more information about provisions, see provision (accounting).

There are different types of reserves used in financial accounting like capital reserves, revenue reserves,statutory reserves, realized reserves, unrealized reserves.

Equity reserves are created from several possible sources:

  • legal reserve fund - it is required in many legislations and it must be paid as a percentage of share capital
  • share premium - amount paid by shareholders for shares in excess of their nominal value
  • legal reserve fund from profit - many legislations require creation of the fund as a percentage of profits
  • remuneration reserve - will be used later to pay bonuses to employees or management.
  • translation reserve - arises during consolidation of entities with different reporting currencies

Reserve is the profit achieved by a company where a certain amount of it is put back into the business which can help the business in their rainy days.


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