Revenue reserve

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Revenue reserve
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Revenue reserve is a term which refers to business’ financial management and means the amount of money that has been relocated of business’ own volition from the profit and loss appropriation account. This happens when the company meets unexpected expenses, for example building repairs. In this case the company creates a special reserve from the withdraw money to undertake repairs on its building[1]. Having a revenue reserve is crucial in company's management since it ensures a company, that in difficult years or situations, they will be extra money which will help to pay the obligations[2].

The withdraw money can be sent back to the origin account whenever the company wish. There is no regulation which says when then the money can be transferred and used[3].

Division of Reserves

Apart from revenue reserve there is another type of reserve called capital reserve. It refers to any reserves that derive from capital and having other aim than distribution of profit. They are not accessible for distribution under the companies act [4].

What is more, the revenue reserve can be also classified into[5]:

  • General Reserves
  • Specific Reserve

General Reserves are reserves that are created for no specific purpose. As it comes from its name, it is created for any general business’ needs[6].

Specific Reserve contrary to general reserves are created for achievement of advanced determined goals. They can be used for that purpose only[7].

Distinctions between capital reserve and revenue reserve

The distinctions are such as[8]:

  1. Whereas capital reserve can be transitioned internal and external, revenue reserve can only be transitioned internal.
  2. Revenue reserve can be both general and specific but capital reserve can only be specific.
  3. Revenue reserve can be distributed as profits while general revenue is not generally distributed as it.
  4. Capital reserve can or not involve receipts of cash and revenue reserve can involve or not payment of cash.
  5. Capital reverse may develop while the period prior to incorporation whereas the revenue reserve can not.
  6. Capital reverse does not come from retaining profits whereas revenue reserve does.

See also: General reserve

Footnotes

  1. Woods. F, Sangster. A, (2004)
  2. Currie M, (2011)
  3. Woods. F, Sangster. A, (2004)
  4. Kay D, Baker J, (2009)
  5. Rajasekaran V, (2011)
  6. Rajasekaran V, (2011)
  7. Rajasekaran V, (2011)
  8. Mukherjee & Hanif, (2003)

References

Author: Angelika Załęska