Revenue Reserve
Definition
A Revenue Reserve is a portion of a company’s profits that is retained in the business rather than distributed to shareholders as dividends. This reserve is classified as distributable, which means it can be distributed to shareholders or used to finance future projects, cushion against operational uncertainties, cover unforeseen business expenditures, or meet long-term financial obligations.
Examples
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General Reserve: A reserve created out of profits for general business purposes. It isn’t earmarked for any specific purpose and can be utilized for any future general needs.
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Dividend Reserve: Funds set aside specifically to pay future dividends to shareholders. This ensures the company can maintain consistent dividend payments even during years of lower profitability.
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Retained Earnings: These earnings are undistributed profits accumulated over the years and reinvested back into the company. They can be used for any corporate purpose, including expanding operations, buying back shares, or paying dividends.
Frequently Asked Questions (FAQs)
Q: What is the difference between a revenue reserve and a capital reserve?
A: A revenue reserve consists of profits generated from a company’s operating activities and can be distributed as dividends. In contrast, a capital reserve is accrued from non-operational activities such as asset revaluations or the sale of fixed assets, and it often cannot be distributed as dividends.
Q: Can a revenue reserve be used to cover losses?
A: Yes, revenue reserves can be used to cover losses, enabling the company to stabilize its financial position during downturns.
Q: How is a revenue reserve created?
A: A revenue reserve is created by retaining a portion of the net profit earned during a financial period, instead of distributing it all as dividends to shareholders.
Q: Is a revenue reserve shown on the balance sheet?
A: Yes, revenue reserves are shown under the “Reserves and Surplus” section of the Equity part of the balance sheet.
Q: Are all reserves classified as revenue reserves?
A: No, reserves like the revaluation reserve or share premium reserve are not considered revenue reserves because they are not generated from an entity’s operational profit and are typically non-distributable.
Related Terms
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Capital Reserve: A reserve created from non-operating sources such as asset revaluation or profit on sale of fixed assets, primarily used for purposes like writing off capital losses or financing specific long-term projects.
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Retained Earnings: The cumulative amount of profit which a company has retained in the business rather than paying it out as dividends. Retained earnings can be spent on various kinds of operational and growth activities.
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Dividend: A portion of a company’s earnings distributed to shareholders. Dividends can be paid out of revenue reserves.
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Provision: An amount set aside out of profits for a known liability or diminishing asset value, often confused with reserves but fundamentally different in accounting.
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Undistributable Reserves: Reserves that cannot be distributed as dividends to shareholders; often created from capital profits and certain adjustments.
Online Resources
Suggested Books for Further Studies
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“Financial Accounting: An Introduction” by Pauline Weetman - This book covers various aspects of financial accounting, including reserves and how they are treated in accountancy.
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“Intermediate Accounting” by Donald E. Kieso, Jerry J. Weygandt, and Terry D. Warfield - This comprehensive resource delves deeply into financial statement preparation and the theory behind financial accounting principles, including reserves.
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“Accounting Made Simple: Accounting Explained in 100 Pages or Less” by Mike Piper - A concise guide that simplifies the basics of accounting, including the fundamentals of revenue and capital reserves.
Accounting Basics: “Revenue Reserve” Fundamentals Quiz
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