The reserves can be broadly bifurcated as revenue reserves and capital reserves. The revenue reserves can be further classified as general reserves and specific 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.
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