What is Reserve

Reserves are amounts appropriated out of profits which are not intended to meet any liability, contingency, commitment in the value of assets known to exist at the date of the B/S.
Creation of the reserve is to increase the workingcapital in the business and strengthen its financial position. Some times it is invested to purchase out side securities then it is called reserve fund.
Types:
1: Capital Reserve: It is created out of capital profits like premium on the issue of shares, profits and sale of assets, etc…This reserve is not available to distribute as dividend among shareholders.
2: Revenue Reserve: Any Reserve which is available for distribution as dividend to the shareholders is called Revenue Reserve.
Provisions V/S Reserves:
1. Provisions are created for some specific object and it must be utilised for that object for which it is created.
Reserve is created for any future liability or loss.
2. Provision is made because of legal necessity but creating a Reserve is a matter of financial strength.
3. Provision must be charged to profit and loss a/c before calculating the net profit or loss but Reserve can be made only when there is profit.
4. Provisions reduce the net profit and are not invested in outside securities Reserve amount can invested in outside securities.

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