Reserve Accounting

Reviewed by Apoorva | Updated on Sep 28, 2020

What is Reserve Accounting?

Reserve accounting is the accumulated profits of the company that is earned over the years and authorised by the board of directors. The reserves can be used to purchase fixed assets, settle legal obligations, pay statutory bonuses, and long-term debts. The profits may be marked as reserves to keep them from being utilised for purposes, such as for dividend payments or for buying back shares.

Understanding Reserve Accounting

Reserve accounting can notify investors that a specific amount of funds is not to be distributed as dividends. Reserve line items need not be captured separately in the balance sheet; they can be added into the retained earnings line item. You must know that the term is not defined under Generally Accepted Accounting Principles (GAAP); however, its application is listed under oil and gas reserves.

Types of Reserves

1. Legal Reserve Fund A legal reserve fund is equivalent to a specific percentage of the capital share.

2. Securities Premium The excess money received by a company above the nominal value of the share, the excess portion is called securities premium. This money can be utilised for purposes, such as issuing full bonus shares to members, buying back shares, and writing off expenses incurred before incorporating the business.

3. Remuneration Reserve The remuneration reserve is saved up to pay incentives and bonuses to the firm's employees or management.

4. Translation Reserve Translation reserves are applicable when an entity operates in multiple countries. In this case, consolidated accounts must be prepared by converting different currencies into the functional currency during the end of the financial year. The difference arising from the conversion difference will be parked in this reserve.

5. Hedging Reserve Such a reserve is generated when the company takes certain stands to protect itself from volatility in some input costs.

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