Revenue reserve

Revenue reserve
See also
Fictitious asset Accumulated Earnings Tax Non current liability Debt service coverage Banking book Working interests Separate property Nominal account Reserve capital

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. 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.

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.

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 .

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

• 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.

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

Distinctions between capital reserve and revenue reserve

The distinctions are such as:

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

Examples of Revenue reserve

• Retained Earnings: Retained earnings refer to the profits that have been earned by a company over time that are not distributed to shareholders as dividends and are instead reinvested back into the company. This money can be used to purchase new equipment, pay off debt, or build up a reserve fund.
• Capital Expenditure Reserve: A capital expenditure reserve is an account set up by a company to fund large projects such as building a new factory or purchasing new equipment. The money in this reserve account is not used to cover regular operating expenses, and instead is only used for long-term investments.
• Debt Reserve Account: A debt reserve account is a special account set up by a company to cover any future debt payments that may be required. This money is usually kept separate from the company’s operating funds and is used to pay off any loans or other debt payments.
• Contingency Reserve: A contingency reserve is a fund set up by a company to cover any future expenses or losses that may arise. This money is not used to cover regular expenses and is instead kept as a reserve fund in case of emergency.

Advantages of Revenue reserve

Revenue reserve is an effective way for companies to manage their finances. The following are the advantages of using revenue reserves:

• Revenue reserves help companies to meet unforeseen expenses that can arise from time to time. This can include repair costs, legal fees, or any other unexpected costs. By setting a revenue reserve, companies can be better prepared for these expenses so that they don't have to dip into other areas of their budget.
• Revenue reserves can be used as a way to save for future investments. By setting aside a portion of profits, companies can invest in new projects or technologies, or build up savings to put towards an expansion.
• Revenue reserves can also be used to protect business owners in the event of a financial crisis. Setting aside a reserve can provide a cushion of protection if a business experiences a downturn or faces unexpected expenses. This can help to ensure the long-term stability of the business.

Limitations of Revenue reserve

• The creation of a revenue reserve can limit the potential for expansion and growth of the company, as the money that is allocated to this reserve cannot be used for other purposes.
• The amount of money allocated to a revenue reserve is usually limited, meaning that if a company experiences significant unexpected expenses, they may not have enough money to cover them.
• If the money set aside in a revenue reserve is not used, it can become stagnant, meaning that it will not accrue any interest, and therefore have no effect on the company’s overall financial position.
• Allocating money to a revenue reserve can also limit the ability of a company to pay dividends to its shareholders, as the money has been set aside for a specific purpose and cannot be used for other things.

Other approaches related to Revenue reserve

• Retention of profits: Retaining profits is a common practice for companies to build a reserve for future use. This process involves a company keeping a portion of its earned profits rather than distributing them to shareholders.
• Contingency reserve: Companies may set aside a portion of their profits in a contingency reserve in order to cover any unexpected costs that may arise in the future. This helps to ensure that the company has the financial resources available to address any unanticipated expenses.
• Rainy day fund: A rainy day fund is a reserve of money set aside in anticipation of a financial emergency or unexpected downturn. This fund helps to protect the company from the financial impact of a crisis, and can be used to cover expenses until the company is able to return to normal operations.

In summary, revenue reserve is a type of reserve that is created by relocating money from the profit and loss appropriation account. Other approaches related to revenue reserve include retention of profits, contingency reserve, and rainy day funds. All of these approaches help to ensure that a company is able to address any unexpected expenses and remain financially stable.

References

• Currie M, (2011), The Search for Income: A Practical Guide to Building an Investment Income Portfolio, Harriman House Limited
• Kay D, Baker J, (2009), ‚Solicitor's Accounts 2009-2010: A Practical Guide, OUP Oxford
• Mukherjee & Hanif, (2003), ‚Financial Accounting, Tata McGraw-Hill Education
• Rajasekaran V, (2011), Financial Accounting, Pearson Education India
• Woods. F, Sangster. A, (2004), Frank Wood's A-Level Accounting, Pearson Education

Author: Angelika Załęska