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Benefits of Reserves

We see, it is the nature of human being that he always thinks to create reserves of everything. In accounting and finance, reserves are created from security point of view. These reserves reduce the risk of loss of business. In company's balance sheet, accountant has to show total amount of reserves as reserves and surplus. It is also duty of accountant to create different type of reserves in company like reserve for doubtful debt, general reserve, contingent reserve, capital reserve and revenue reserve. Some special reserves are created according to situation of business.

Every type business, you will a new name reserve, suppose, if you are dealing in foreign exchange, you have to create Forex Reserves for reducing the risk of fluctuation of currency market. Now, we discuss its main benefits.

1. To stabilize the share's market value

Do, you know, reserves are very important for stabilizing the share's market value. According to company law, it is very necessary to create reserve out of current profit before distribution of net profit to shareholders as dividend. By creating reserves out of shareholder's profit, company gets the capacity to tolerate every type of business loss and survive in unfavorable condition by using this reserve money. With this, company can perform better and it helps to stabilize the share's market value.

2. Legal Requirement for creating special reserves

Sometime it is  it is required in many legislations and it must be legal reserve as a percentage of share capital. So, it is good to create that type of reserve for protecting from penalty.

3. Payment of Company Expenditures on Time

Reserves are very useful to pay company's all expenditures on the time. Suppose, if company has to pay loan after 2 years on specific date and company has already same amount in sinking fund reserve, there will be no problem for company to pay on the time. Other example is of remuneration reserve. It will be used later to pay bonuses to employees or management.

4. Security of All Types of Financial Risks

Accountant has to create the reserves and provisions to secure the business from all types of financial risk like liquidity risk, solvency risk and many others. Without creating sound reserves and showing it in the liability side of business, company can face financial disaster and crisis.

5.  Everything may be in Reserves

One of major benefit of reserves is that we can put every thing in reserve form. Suppose, you have to go to office, you will surely check your car's petrol and see whether is it on the reserve point or not? Like this, accountant will see reserve amount of stock, tools, equipment and computer. If we have acquired new computer, we can use when our first computer faces any problem. At that type, we continue our work.

Finally, I want to say that there are lots of benefits of reserves but you also see, whether your ROI on reserve is more than  time value of money if you save that money in bank at cut off rate. Sometime, excess reserve is also misuse of money.

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Accounting Education: Benefits of Reserves
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