MBA Accounting & Finance

WHAT ARE RESERVES?

Reserves are appropriations of profit namely when profits have been ascertained after deducting all expenses which includes provision and others. Reserves are residual earnings after all expenses and taxation which belongs to the owners namely the shareholders.

There are essentially two(2) types of Reserves:

• Capital Reserves

• Revenue Reserves

WHAT ARE CAPITAL RESERVES?

Capital Reserves:

• Are appropriation from profits ( refer above) which cannot be distributed by way of cash dividends.

• These capital reserves arises mainly from (i) equity transactions between the enterprise and its shareholders; (ii) from adjustments arising in accounting for business combinations; (iii) from differences arising on translation of foreign currency operations; (iv) from surpluses arising from asset revaluation; (iv) any unrealized gain which has not been included in income.

• Examples of capital reserves includes: share premium, capital redemption reserves, capital reserves arising on merger and acquisition, statutory reserves, asset revaluation reserve and exchange fluctuation reserves.

WHAT ARE REVENUE RESERVES?

Revenue Reserves are:

• Are appropriation from profit ( refer above) which can be distributed by way of cash dividends although some may be set aside for other purposes.

• Examples like retained profits and general reserves.

SUMMARY: TO RECAP FOR OWNERS’ EQUITY SIDE OF THE BALANCE SHEET

Balance Sheet And Its Owners’ Equity Side consists of :

Paid In Capital + Capital Reserves + Revenue Reserves