Reserve (accounting)

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In financial accounting, reserve is any part of shareholders' equity, except for basic share capital. In nonprofit accounting, an "operating reserve" is the unrestricted cash on hand available to sustain an organization, and nonprofit boards usually specify a target of maintaining several months of operating cash or a percentage of their annual income, called an Operating Reserve Ratio. [1]

There are different types of reserves used in financial accounting like capital reserves, revenue reserves,statutory reserves, realized reserves, unrealized reserves.

Equity reserves are created from several possible sources:

  • Reserves created from shareholders' contributions, the most common examples of which are:
  • legal reserve fund - it is required in many legislations and it must be paid as a percentage of share capital
  • share premium - amount paid by shareholders for shares in excess of their nominal value
  • Reserves created from profit, especially retained earnings, i.e. accumulated accounting profits, or in the case of nonprofits, operating surpluses. However, profits may be distributed also to other types of reserves, for example:
  • legal reserve fund from profit - many legislations require creation of the fund as a percentage of profits
  • remuneration reserve - will be used later to pay bonuses to employees or management.
  • translation reserve - arises during consolidation of entities with different reporting currencies

Reserve is the profit achieved by a company where a certain amount of it is put back into the business which can help the business in their rainy days.

Sometimes reserve is used in the sense of provision. This is inconsistent with the terminology suggested by International Accounting Standards Board. For more information about provisions, see provision (accounting).

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