Specific reserves in accounting refers to the reserves that are created for a specific purpose in business. These reserves cannot be used for any other purpose apart from the purpose for which they were created.
Despite these restrictions, the specific reserves can be utilised for a different purpose other than the purpose for which they were created, if the article of association allows for such a change and the board of directors agree to the same.
Specific reserves can be established by debiting the Profit and Loss Appropriation Account.
Examples of Specific Reserve
Some of the examples of specific reserve are:
1. Debenture Equalisation Reserve
2. Debenture Redemption Reserve
3. Investment Fluctuation Reserve
Debenture Equalisation Reserve: The purpose of creation of dividend equalisation reserve is to equalise the dividend rate over a period of time. In times of high profits, the company can keep a portion of this profit in the dividend equalisation reserve account and the funds are utilised for paying dividends to shareholders at times when a company is facing low or no profit at all.
Debenture equalisation reserve is created by passing this journal entry
Profit and Loss Appropriation A/c Dr.
To Dividend Equalisation Reserve A/c
Debenture Redemption Reserve: Debenture redemption reserve is created with the purpose of debenture redemption at the end of a specific period. It is materialised by setting aside a specific amount of money from the profits of the business in this reserve account.
Then the amount that is transferred to this account is invested in securities, which will gather some interest due to the effect of compounding and the same amount can be used to pay the debenture holders.
The debenture redemption reserve is created by passing this journal entry.
Profit and Loss Appropriation A/c Dr
To Debenture Redemption Reserve A/c
Investment Fluctuation Reserve: This reserve is created with the purpose of meeting any losses that can arise from investments made outside the business in investment forms like shares, debentures and other types of securities.
Investments are subject to market risks and therefore based on market conditions. The amount invested in shares or debentures can suffer loss, to counter the impact of such a loss, the investment fluctuation reserve is created by setting a portion of profits made by the business.
The investment fluctuation reserve is created by passing this journal entry
Profit and Loss Appropriation A/c Dr.
To Investment Fluctuation Reserve A/c
Objectives of creating Specific Reserves
The following are some of the objectives of creating a specific reserve:
1. For meeting expenses that are due towards outstanding liabilities.
2. For writing off any kind of loss that arises from depreciation.
3. For meeting any specific contingency that can arise in the form of bad debts or doubtful debts or provisions for fluctuations in the investment.
This concludes the topic of Specific Reserve, which is an important topic of Accountancy for Commerce students. For more such interesting articles, stay tuned to BYJU’S
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