Reviewed by Sep 28, 2020| Updated on
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.
Gross Working Capital
Gross working capital refers to the total current assets of a company. Read more
A statutory audit is a legally required check of the accuracy of the financial statements and records of a company or government. Read more
Deferred revenue, also called unearned revenue, applies to advance payments obtained by a company for goods or services that are to be provided or performed in the future. Read more
Operating revenue refers to the revenue generated by a company from its primary activities. Read more
An escalator clause is also known as an escalation clause, where the provision allows for an automatic increase in the wages or prices. Read more
The agency problem is a scenario of a conflict of interest which is inherent in all relations wherein one party is anticipated to operate in the best interests of another party. Read more
Amortisation is an accounting strategy used to regularly reduce a loan's book value or an intangible asset's book value over a given period of time. Read more
The reorganisation of a firm with the view of enhancing the efficiency of the operation is referred to as the rationalisation. Read more
A profit centre refers to a branch, unit, or division of a company which directly adds or which normally adds to the bottom-line or profits of the company as a whole. Read more
Authorised Share Capital
Authorised share capital is the number of stock units (shares) that a company may issue, as set out in its association memorandum or incorporation papers. Read more