General reserve

General reserve
See also

General reserve is an accounting instrument of securing an entity against its future liabilities, the maturity of which is not certain, while the certainty, or at least very probable, is the very fact of their occurrence. Their creation is mainly related to the risk of operations, so there is a reference to the precautionary principle. Reserves are recognized in the balance sheet liabilities. Other objectives of general reserve include:

  • improve of financial position and worth of the company
  • prepare for payment of additional dividends to shareholders
  • prepare for risk of eventual future losses from investment

Reserves come in two forms:

  • as provisions for liabilities
  • as passive accruals of costs

Provision for deferred income tax[edit]

The provision for deferred income tax is made up of units that are taxpayers of corporate income tax. If an entity's annual financial statements are not subject to the audit and announcement requirements, it may depart from determining deferred tax assets and deferred tax liabilities.

The provision (and assets) of deferred income tax is created in connection with temporary differences between the value of assets and liabilities shown in the accounting books and their tax value as well as the tax loss possible to be deducted in the future.

Provision for deferred income tax is created in the amount of income tax that will be payable in the future in connection with the occurrence of positive temporary differences, i.e. differences, which will increase the basis for calculating income tax in the future. Its amount is determined taking into account income tax rates applicable in the year when the tax obligation arose[1]

Provision for retirement benefits and similar[edit]

A provision for retirement and similar benefits (e.g. retirement benefits, jubilee bonuses, bonuses, unused holidays, etc.) is created when the entity is obliged to pay them under the law, collective agreement or employment contracts and if their amount is significant. The decision on this matter is made by the head of the unit.

In units, in which a given financial year, the number of persons entitled to receive benefits is small and the amount of benefits paid is not significant (e.g. a one-month salary), the unit's manager may refrain from creating provisions due to this. Including in the costs of a given period of benefits paid out will not significantly distort the financial result for this period. The solution adopted by the entity regarding the creation of provisions for retirement benefits or withdrawal from their creation should be reflected in the accounting policy adopted by the entity[2].



Author: Magdalena Lewicka