Question

Give a short note on Reserves​

Answer 1

Reserves :-

A reserve is profits that have been appropriated for a particular purpose. Reserves are sometimes set up to purchase fixed assets, pay an expected legal settlement, pay bonuses, pay off debt, pay for repairs and maintenance, and so forth.

Actually, in addition to the capital contributed by the proprietor, the amount set aside from the profits or surpluses to reserves belongs to the proprietor, which will help the business during difficult financial period. It is an appropriation of profits and not charged on the profits. This means that in the case of loss, reserves cannot be created. Reserves help in strengthening the financial position of the business enterprise.

Answer 2

hey mate here is your answer.....

Profit earned by a business is payable to its proprietor. But the proprietor does not normally draw the whole amount of profit. He leaves a portion of profit in the business in order to increase working capital and to strengthen financial position of the business. This portion is known as reserve.

According to Yorston, Smyth and Brown, "Reserve should include amounts set a side out of profits and other surplus which are not intended or necessary to meet any liability, contingency or diminution in the value of assets known to exist at the date of the balance sheet".

Thus the portion of profit which is not paid to proprietor, but is kept a part for meeting some known or unknown losses is called reserve, e.g., reserve fund, contingency fund etc. The amount is debited to profit and loss appropriation account and credited to concerned reserve account.

It is to be noted that reserves can be created out of profit only. It cannot be created if the business incurs a loss.

hope it helps you....