What are Different Types of Reserve and Surplus

Last updated at Dec. 16, 2024 by Teachoo

Reserve and Surplus means profit or funds kept aside in a separate account for some purpose

It is current year profit from business which is transferred to some other account

Suppose a company earned 100000 Profit,it has 1000000 balance in Capital A/c

It transferred 30000 in General Reserve

It now has 70000 profit left in P&L A/c and 30000 balance in General Reserve

This profit can be used for any purpose by the business

It is the reserve which is created out of capital profit of the business

(i.e. profit other than profit from ordinary activities of business)

Example

Suppose company purchased some other company’s assets for 100000 but the actual fair market value of those assets were 160000

In this case,60000 is Capital Reserve

It is the amount transferred to a particular reserve on

Entry passed

Capital Redemption Reservr Dr

To Profit and loss/General Reserve

It is done to protect the interest of shareholders

It is the amount which is transferred to separate account .it is to ensure that same amount of dividend is declared from year to year

Suppose a business earns profit in 3 years as follows

Every year,it wants to give 100000 dividend

In this case,it can transfer 20000 in year 2 to Dividend Reserve and can use 2000 in Year 3 so that it declares equal dividend every year