Example of Reserves and Surplus

What are Reserves and Surplus?

Reserves and Surplus are defined as appropriated amounts that are maintained for a specific purpose, and they are utilized according to their specific nature or the type of such reserve and surplus. These reserves and surplus are maintained by the company to tackle any future uncertainty or contingency. Some of the common reasons for which companies maintain reserves and surplus are, for strengthening the company’s financial standing in the market, for paying off the dividends to all the shareholders, fulfilling working capital requirements, etc. Sometimes the business domain requires maintaining reserves, even sometimes in cash in order to manage the reduction in revenues and slow-paying debtors. Sometimes the statutory requirements may be the reason a company is required to maintain reserves like Debentures redemption reserves, etc....

Types of Reserves and Surplus

1. Capital Reserve: The reserve of capital is like a reserve turn out of capital gains. This primarily includes those gains that are not part of the company’s core business activity. It is maintained to ensure that the business is prepared for unexpected times such as increasing inflation, sudden payments, and fund requirements....

Example of Reserves and Surplus

The following points are required to be considered by the management of XYZ Ltd....

Advantages of Reserves and Surplus

1. Internal Financing: Reserves are considered the most essential and useful source when it comes to internal financing in any business. In cases where the business is in requirement of funds for some commercial operations or to fulfill its financial obligations, the primary and the very approach source of funds is the general reserve generated by the company....

Disadvantages of Reserves and Surplus

1. Manipulation of Accounts: Losses are adjusted against the reserves because a business is facing losses. In such a case, the accounts will be highly manipulated and will not display the real picture of the profitability of the business. And, proper reporting will not be passed on to the readers of the financial statements....

Difference Between Reserves and Surplus

Basis Reserves Surplus Meaning The reserve may be made in cash so that the company can manage revenue reduction or slow-paying debtors A surplus is a form of excess, and it is not the same as a reserve. Source Reserves are the retained balance of a company’s profit and loss account after applying dividends and tax provisioning Surplus is the remaining balance after these items are paid to shareholders. Purpose Reserves are the funds earmarked for a specific purpose, which the company intends to use in the future. The surplus is where the profits of the company reside and set aside after applying all the adjustments....

Frequently Asked Questions (FAQs)

1. What are reserve and surplus?...