Types of Reserves
Types of Reserves
To have a better understanding of the
nature and purpose of Reserves, let us classify them into different types.
Reserves are generally classified into:
1. Revenue Reserves- Revenue
Reserves are set aside out of
revenue profits which are available for distribution as dividend. Revenue
reserves can be classified into:
(i) General
Reserve- General Reserve is
the amount set aside out of profits not for any specific purpose. It is
available for any future contingency or expansion of business. Such reserve strengthens
the financial position of the business. Example is General Reserve.
(ii) Specific Reserve- Specific Reserve is
that reserve which is set aside for a specific purpose and can be utilized only
for that purpose. For example, Workmen Compensation Reserve is a specific
reserve because it is maintained to pay compensation to workmen. Debentures
Redemption Reserve, Capital Redemption Reserve, Investment Fluctuation Reserve,
etc., are other examples of Specific Reserve. It should be kept in mind that both
General Reserve and Specific Reserve are set aside as appropriation of profits.
2. Capital Reserves- Capital Reserves are set aside out of capital profits
and are normally not available for distribution as dividend. In other words,
reserve created out of capital profits and which is not readily available for
distribution as dividend among the shareholders is called Capital Reserve.
Examples of capital reserves are:
(i) Profit prior to incorporation,
(ii) Premium on issue of shares or debentures,
(iii) Profit on redemption of debentures,
(iv)Profit on forfeiture of shares,
(v) Profit on sale of fixed assets,
(vi) Capital Redemption Reserve, and
(vii) Profit on revaluation of fixed assets and liabilities.
All capital profits should, therefore, be
regarded as Capital Reserves. Capital reserves may or may not involve any
receipts of cash. Having understood the meaning and purposes of Revenue Reserve
and Capital Reserve, let us distinguish them.
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