Page 247 - DMGT104_FINANCIAL_ACCOUNTING

Unit 10: Accounting and Depreciation for Fixed Assets

distribution of profits. It is this crucial factor alone which tends to provide the much-needed Notes
financial stability to an corporate undertaking.
Capital reserve comes into existence from out of the capital profits arising from:

 Profits emerging from the revaluation of fixed assets after observing all restrictions;
 Profits accruing on the sale of fixed assets;
 Profits from the re-issue of share once forfeited by a company’s
 Issue of shares at premium
 Profits arising at the time of amalgamation and absorption of companies
 Profit prior to incorporation of a company;
 Creation of capital Redemption Reserve upon the redemption preference shares.
Capital reserves always have credit balance which is shown on the liabilities side of
the balance sheet.

Whenever this reserve is utilized, capital reserve account is debited. It is also required that
the manner of the utilization of capital reserve during an accounting period must be
clearly stated in the balance sheet either in its body itself or by way of a footnote to the
financial statements. This is due to the reason that there are rigid restrictions, both laid
down by law and enforced by accounting standards, on the use of capital reserve.

 Revenue Reserves: Revenue reserves are created out of revenue profit which is usually
distributable profits. All distributable profits are not always available for paying dividend
since a certain amount may be required to be kept aside either by law (minimum) or as a
managerial decision (higher amount) for business needs. It is only after this that profit
will be available for distribution by way of dividend.
Examples of revenue reserves are:
 General Reserve
 Dividend Equalisation Reserve
 Debenture Redemption Reserve (only after complete redemption of those debenture
under whose trust deed this reserve were created).
 General Reserve: A general reserve is retention of a portion of revenue profits for the
improvement of the overall financial status of an enterprise and to improve its health in
general.
An important point about general reserve is that it is a salient feature of corporate finance.
The creation and maintenance of general reserve helps in realizing certain well recognized
purposes especially from the viewpoint of financial management.
 Improvement of the general financial position of the business by conserving
resources, which would have otherwise been frittered away at the expense of prudent
management.
 Arrangement for meeting unforeseen and abnormal losses irrespective of their
nature.

 Providing avenues for the further expansion of business operations. General reserve
is created by debiting the profit and loss appropriation account and crediting general
reserve account. The latter account is placed on the liabilities side of the balance
sheet. When the balance on this account is used for any purpose, general reserve
account is debited.

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