What is considered increase reserve and surplus?
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Reserves and Surplus
Reserves and surplusAt the end of an accounting period the company may decide to transfer part of the profits to a reserve and retain the balance in the profit and loss account. The reserve created out of profits transferred from profit and loss account is called general reserve. The balance in the profit and loss account is called a surplus and will be shown under this head in the balance sheet.
The company can use the general reserve for various purposes including issue of bonus shares to shareholders and payment of dividend when profits are insufficient.
The premium received when shares are issued at a premium to the face value is shown under the head reserves and surplus.
Capital Surplus
To understand what Capital Surplus is, you must first understand the concept of Surplus. From an accounting standpoint, surplus is the difference between the total par value of the stock outstanding and the shareholder equity and Proprietorship Reserves. (Don't panic! It's not as complicated as it sounds!) You already know what par value and shareholder equity are. The only thing you haven't learned about is Proprietorship Reserves, which we will discuss in a minute.
Almost always part of the surplus is a result of retained earnings (which would increase the shareholder equity). There is a specific part of the surplus that comes from other sources (such as increasing the value of fixed assets carried on the balance sheet, the sale of stock at a premium, or the lowering of the par value on common stock). These "other" sources are frequently called "Capital Surplus" and placed on the balance sheet. In other words, Capital Surplus tells you how much of the company's shareholder equity is not due to retained earnings.
Reserves & Proprietorship Reserves
Reserves deserve special attention when analyzing a company. Although we aren't going to discuss them in depth until a later lesson, it would be wise to lightly touch on them so you have a general understanding of their purpose. When a business creates a "Reserve", they are essentially setting aside a certain amount of money for a specific purpose. Often times, reserves are monies set aside to act as a buffer against future losses. Let's look at a few examples:
·If a company had a substantial amount of their current assets in receivables, they would set aside money in casesome of the customers didn't pay their bills. This is a reserve for doubtful and bad accounts.
·If a business had a build up of inventories that risked losing their value, management would create a reserve to offset losses.
·If a manufacturing corporation decided to save money to build a new widget plant, they would put money in a reserve until they had saved enough to pay for it.
Proprietorship Reserves are set up to alert investors that a certain part of the shareholder's equity cannot be paid out as cash dividends since they have another purpose.
Reserves and surplusAt the end of an accounting period the company may decide to transfer part of the profits to a reserve and retain the balance in the profit and loss account. The reserve created out of profits transferred from profit and loss account is called general reserve. The balance in the profit and loss account is called a surplus and will be shown under this head in the balance sheet.
The company can use the general reserve for various purposes including issue of bonus shares to shareholders and payment of dividend when profits are insufficient.
The premium received when shares are issued at a premium to the face value is shown under the head reserves and surplus.
Capital Surplus
To understand what Capital Surplus is, you must first understand the concept of Surplus. From an accounting standpoint, surplus is the difference between the total par value of the stock outstanding and the shareholder equity and Proprietorship Reserves. (Don't panic! It's not as complicated as it sounds!) You already know what par value and shareholder equity are. The only thing you haven't learned about is Proprietorship Reserves, which we will discuss in a minute.
Almost always part of the surplus is a result of retained earnings (which would increase the shareholder equity). There is a specific part of the surplus that comes from other sources (such as increasing the value of fixed assets carried on the balance sheet, the sale of stock at a premium, or the lowering of the par value on common stock). These "other" sources are frequently called "Capital Surplus" and placed on the balance sheet. In other words, Capital Surplus tells you how much of the company's shareholder equity is not due to retained earnings.
Reserves & Proprietorship Reserves
Reserves deserve special attention when analyzing a company. Although we aren't going to discuss them in depth until a later lesson, it would be wise to lightly touch on them so you have a general understanding of their purpose. When a business creates a "Reserve", they are essentially setting aside a certain amount of money for a specific purpose. Often times, reserves are monies set aside to act as a buffer against future losses. Let's look at a few examples:
·If a company had a substantial amount of their current assets in receivables, they would set aside money in casesome of the customers didn't pay their bills. This is a reserve for doubtful and bad accounts.
·If a business had a build up of inventories that risked losing their value, management would create a reserve to offset losses.
·If a manufacturing corporation decided to save money to build a new widget plant, they would put money in a reserve until they had saved enough to pay for it.
Proprietorship Reserves are set up to alert investors that a certain part of the shareholder's equity cannot be paid out as cash dividends since they have another purpose.
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