Nature Reserves or provision of funds

The amount saved is put aside for one of the following five goals:

(A) to meet the future liability or loss;

(B) to strengthen the financial position of the business;

(C) to meet a specific purpose;

(D) to redeem a debt;

(E) for the replacement of a waste well.

(F) There are two ways in which the amount available for distribution as profit can be reduced:

(1) Indirectly, viz. gross profit or debit to the profit and loss.

(2) or, directly. ie, out of profits divisible by debiting the profit and loss appropriation.

Profit and loss account is debited only when the object is to satisfy a liability or contingent, or future or expected loss, or replace a wasting asset. In all other cases, the appropriation of profit and loss account is debited.

(3) The amount that is set aside, the mayor can not be invested, and if employed, may be invested in or out of business. This depends on the object you are trying to be served. It is customary to invest the money outside the business when the object is to redeem a liability or to replace a wasting asset. The money can be invested outside or inside the company at its discretion, if the object is to strengthen the financial position of the business.

Meaning of terms:

1. The Fund. If the amount of reserves is invested in securities outside the reserve is defined as a 'reserve fund'.

2. Reserve. If no amount set aside by the profit is invested in securities outside, is defined as 'spare'.

3. Provision. If amount set aside as a charge against profits or surpluses to meet:

(A) Depreciation for the renewal of the asset.

(B) any known liability, the amount of which can not be ascertained with precision. The provisions are generally created by debiting the profit and loss account. Provisions are also sometimes referred to as 'special reserves' accountants. Provisions are created even when there are profits in the industry. Provisions are not in excess. Are not available for distribution among the owners or shareholders. However, the provision in excess of requirement is a surplus. If any provision is redundant, should be credited to the appropriation of profit and loss account.

It should be noted that the sums set aside to meet known liabilities, which amount can be determined accurately, do not fall within the definition of a provision and should therefore be called as accrued expenses. For example, outstanding rent, interest, etc., are accrued expenses and provisions.

Types of specific provisions (reserves)
As already mentioned, the provisions are of the following types:

(I) Provision for doubtful debts;

(Ii) Reserve for discounts on debtors;

(Iii) Reserve discount on creditors;

(Iv) Reserve for repairs and renewals.

General Reserve

Reserves are retained profits. They are part of the surplus. They represent the amount kept aside from profits. There may be reserves if there are no profits. Reserves are retained earnings. These appropriations of profits. Even if the provisions are a pre-profit issues, reservations are a post-profit issues. You can not talk of creating reserves, without discovering the profits. It is a good business policy to create reserves. They strengthen 'the' financial position of the business. Reserves are created for different purposes. They can be for business expansion, which can be for the equalization of dividends or can be for the repayment of bonds or loans. Again, the reserves can be created from the profits or capital gains income. The reserves created from the profits of capital are called capital reserves, while others are called retained earnings.

Capital reserves

Capital reserves were created from the profits of capital. The profits of capital are not regular trading profits. It is rare profits from operations. Capital reserves are not generally available for distribution as dividend. They are set aside to strengthen the company's financial position or to meet capital losses. The following are examples of capital gains:

(I) Gains on disposal of fixed assets'.

(Ii) Profit before incorporation.

(Iii) Profit on redemption of bonds.

(Iv) a premium of issuing shares or bonds.

(V) Profit on forfeiture of shares.

(Vii) Net acquisition of business.

(Viii) results that were not earned in the normal course of business.

Capital reserves can be used in the following ways:

(A) Issuance of bonus shares.

(B) Amortization of goodwill.

(C) Writing off preliminary expenses.

(D) Write off / Equity issue costs.

(E) Write compensate for losses before incorporation.

Revenue Reserve

Revenue reserves are created from the profits of revenue. They are available for distribution as dividend. Profit reserves are of two types, those immediately so available for distribution and those not immediately available as well.

(A) general reserve

This reserve was created by putting the profits of revenue. The objective is to strengthen the overall financial position of the business. Not for a specific purpose. This is a free reserve. It acts as a safety cushion against any unforeseen contingencies in the future. And 'immediately available for distribution as dividend profit.

(B) specific reserves

Even this was created by putting the profits of revenue. But it is for a specific purpose. This is not immediately available for distribution. For example, reserve created for repayment of the bonds. During the period of responsibility, this reserve is not available for distribution. Become a general reserve for the repayment of bonds. Similarly, a reservation may be created to
equalization of dividends .......