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Reserve and Surplus means profit or funds kept aside in a separate account for some purpose 

 

Different type of Reserves and Surplus

 

General Reserve(Revenue Reserve)

It is current year profit from business which is transferred to some  other account

 

Suppose a company earned 100000 Profit,it has 1000000 balance in Capital A/c

It transferred 30000 in General Reserve

It now has 70000 profit left in P&L A/c and 30000 balance in General Reserve

This profit  can be used for any purpose by the business

 

Capital Reserve

It is the reserve which is created out of capital profit of the business

(i.e. profit other than profit from ordinary activities of business)

Example

Suppose company purchased some other company’s assets for 100000 but the actual fair market value of those assets were 160000

In this case,60000 is Capital Reserve

 

 

 

Capital Redemption Reserve

It is the amount transferred to a particular reserve on

  • Redemption of Preference shares
  • Buy back of shares

Entry passed

Capital Redemption Reservr Dr

              To Profit and loss/General Reserve

It is done to protect the interest of shareholders

 

Dividend Reserve

It is the amount which is transferred to separate account .it is to ensure that same amount of dividend is declared from year to year

Suppose a business earns profit in 3 years as follows

  1. 100000
  2. 120000
  3. 80000

 

Every year,it wants to give 100000 dividend

In this case,it can transfer 20000 in year 2 to Dividend Reserve and can use 2000 in Year 3 so that it declares equal dividend every year

 


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Teachoo