What are reserves? why is it considered to be important to maintain reserves?
Answers
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Answer:
Reserves help in strengthening the financial position of the business enterprise. They are not created to meet any liabilities, contingencies or commitments. It is important to mention here that the business cannot create reserves in anticipation of some losses; however, in case of loss, reserves can be utilized.
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Answer:
Explanation:
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.
They are not created to meet any liabilities, contingencies or commitments. It is important to mention here that the business cannot create reserves in anticipation of some losses; however, in case of loss, reserves can be utilized. When amount of reserve is invested in some outside securities it is known as ‘Reserve Fund’. Since reserves are appropriation and not charge against profits, they are shown in Profit and Loss Appropriation Account instead of Profit and Loss Account.