Types of Reserves

The amount that is kept out of the profits of an enterprise to meet the future ‘unknown’ or ‘unexpected’ liabilities is known as reserve. The creation of reserves helps in meeting the unforeseen expenses or losses that may occur in the near future. It should be noted that the creation of reserves is not compulsory. Its creation completely depends upon the will of an enterprise. It is an appropriation of profits that is created out of the undistributed profits of the business. It helps in strengthening the financial position of the business. Besides this, the number of reserves can also be utilized for the distribution of profits among its shareholders. Different types of Reserves are discussed below


Types of Reserves


The reserves can be broadly bifurcated as revenue reserves and capital reserves. The revenue reserves are two types: general reserves and specific reserves.

Revenue Reserves

The reserves that are created out of those profits which are earned from carrying out the normal activities of a business are known as Revenue reserves. In other words, revenue reserves are created out of the revenue profits of the firm. These reserves are created to meet the unexpected expenses or losses of the business. It helps to strengthen the financial soundness of the business. These can be utilized for the distribution of dividends among the shareholders. In the words of Kohler, ‘Reserves are that portion, or any thereof, of the net worth or total equity of an enterprise representing retained earnings available for withdrawal by proprietors’. Some of the examples of Revenue reserves are Debenture Redemption Reserve, Investment Fluctuation Reserve, General Reserve, etc. The Revenue reserves can be further classified as General Reserve and Specific Reserve.

General Reserves: These are the reserves that are created out of revenue profits without any specific purposes. In other words, these reserves are maintained to meet the future unforeseen liabilities of the business. The purposes of utilizing such reserves are not specified and thus it can also be used to enhance or improve the financial position of the business. These reserves are used as per the discretion of the management for general purposes. The given below are some purposes for which the general reserve can be utilized.

  • To strengthen the financial position of the business.
  • To meet unexpected expenses or losses.
  • To provide a channel for expanding the business.

Specific Reserves: These are the reserves that are created out of revenue profits for fulfilling the specific purposes of the business. These reserves cannot be utilized for the purposes other than specified purposes for which it has been created. For example, Debenture Redemption Reserve is a specific reserve that can be utilized for redeeming the debentures of the
company. Some of the examples of specific reserves are Investment Fluctuation Fund, Workmen Compensation Fund, Dividend Equalisation Fund, Sinking Fund, Development Rebate Reserve, etc.

Capital Reserves

The reserves that are created out of the capital profits of a business are known as Capital reserves. Capital profits are the profits that are not earned in normal business activities. These reserves are created out of the transactions which are capital in nature. Therefore, all the capital profits arising from the specific capital nature transactions can be termed as Capital reserves. The following are some examples of capital reserves.

  • Profit on sale of fixed assets.
  • Profit on re-issue of forfeited shares.
  • Profit on revaluation of assets and liabilities.
  • Premium received on issue of shares and debentures.
  • Profit on redemption of debentures.
  • Profit prior to incorporation.

These reserves are utilized by the business for writing off the capital losses and cannot be utilized for the distribution of dividends among the shareholders.


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