Reserve and Surplus means profit or funds kept aside in a separate account for some purpose
Different type of Reserves and Surplus
General Reserve(Revenue Reserve)
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
Capital Reserve
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
Capital Redemption Reserve
It is the amount transferred to a particular reserve on
- Redemption of Preference shares
- Buy back of shares
Entry passed
Capital Redemption Reservr Dr
To Profit and loss/General Reserve
It is done to protect the interest of shareholders
Dividend Reserve
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
- 100000
- 120000
- 80000
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
