Is reserves included in profit and loss account
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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.
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.
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