>> February 12, 2009
There are two main types of reserves which I am explaining with following way :-
1. Open reserves
Open reserves may be defined all reserves which shows in the balance sheet. Every person or public can know such reserves of company. Those reserves provide full information to shareholders about which amount has gone to reserves or why they are not getting all amount of dividend. This type can also divide in sub parts
a) Capital reserves
Capital reserves are main type of open reserves. It is not created out of profit of company. This reserve is not used for distributing the dividend to shareholders of company. The main sources of these reserves are following:-
- profit earned prior to incorporation
- Premium on the issue of shares and debentures.
- Profit on reissue of forfeited shares
- Profit set aside for the purpose of redemption of preference shares.
- Profit on sale of undertaking or part of it.
- Surplus on revaluation of assets and liabilities.
b) Revenue reserves
Revenue reserves are that part of open reserves which are created out of profit of company. It is showed in profit and loss appropriation account .It can be used for dividend to shareholders. There are following benefits of revenue reserves:-
- Extension of business
- Set off unknown losses of business.
- Used to create strength in the financial position of business.
- To make stability in the dividend rate.
These revenue reserves can also divide into two parts.
i) general reserves
ii ) Specific reserves = Specific reserves includes dividend equalization reserve, debenture redemption reserve , staff reserve. Investment fluctuation reserve, taxation reserve and contingency reserves.
2. Secret Reserves
Secret reserves may be defined as that type of reserves which is not shown in final account of company. Means it has neither been shown in profit and loss appropriation account nor in balance sheet. These reserves can easy created by showing less value of assets and more value of liabilities in balance sheet. If a company has created such secret reserves for the benefits of company, it will be surely strong his financial position. These secrete reserves can be created by following ways:
- showing heavy depreciation value
- Showing the less value of goodwill and closing stock of business.
- Secrete of sale value of business.
- Showing heavy liabilities which is not of company.
- Showing capital expenses as revenue expenses.
- Grouping of free reserves with creditors.
- Current asset not shown in balance sheet.
But company laws are not in favor because, it increases accounting scams.
i) Foreign currency translation reserve
This reserve is made on the estimation of loss of translating from foreign currency to domestic currency. When a company is dealing more than one country, at that time this reserve is needed for keeping money separated for adjustment of currency differences due to difference in the rates applied. It is shown in the liability side of company.
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