Name and explain different types of reserves in details.
Name and explain different types of reserves in details.
As we know that the purpose of creating a reserve is retention of profit of the business for a general or a specific purpose. The following are the types of the reserve as per their purpose of creation.
(i) General Reserve: Sometimes the reserve is created without specifying the purpose, such reserve is called General reserve. It is also termed as a free reserve because the management can freely utilise it for any purpose. General reserve strengthens the financial position of the business.
(ii) Specific Reserve: On the other hand, a reserve which is created for some specific purpose and can be utilised only for that purpose is called Specific reserve. Examples of specific reserves are given below
(a) Dividend equalisation reserve (b) Workmen compensation fund (c) Investment fluctuation fund (d) Debenture redemption reserve
Besides the above one, reserves are also classified as revenue and capital reserves according to the nature of the profit out of which they are created.
(iii) Revenue Reserve: Revenue reserves are created from revenue profits which arise out of the normal operating activities of the business and are otherwise freely available for distribution as dividend. Examples of revenue reserves are
(a) General reserve (b) Workmen compensation fund (c) Investment fluctuation fund (d) Dividend equalisation reserve (e) Debenture redemption reserve
(iv) Capital Reserve: Capital reserves are created out of capital profits which do not arise from the normal operating activities. Such reserves are not available for distribution as dividend.
As we know that the purpose of creating a reserve is retention of profit of the business for a general or a specific purpose. The following are the types of the reserve as per their purpose of creation.
(i) General Reserve: Sometimes the reserve is created without specifying the purpose, such reserve is called General reserve. It is also termed as a free reserve because the management can freely utilise it for any purpose. General reserve strengthens the financial position of the business.
(ii) Specific Reserve: On the other hand, a reserve which is created for some specific purpose and can be utilised only for that purpose is called Specific reserve. Examples of specific reserves are given below
(a) Dividend equalisation reserve (b) Workmen compensation fund (c) Investment fluctuation fund (d) Debenture redemption reserve
Besides the above one, reserves are also classified as revenue and capital reserves according to the nature of the profit out of which they are created.
(iii) Revenue Reserve: Revenue reserves are created from revenue profits which arise out of the normal operating activities of the business and are otherwise freely available for distribution as dividend. Examples of revenue reserves are
(a) General reserve (b) Workmen compensation fund (c) Investment fluctuation fund (d) Dividend equalisation reserve (e) Debenture redemption reserve
(iv) Capital Reserve: Capital reserves are created out of capital profits which do not arise from the normal operating activities. Such reserves are not available for distribution as dividend.
