CREATION OF RESERVES IN BOOKS OF ACCOUNTS
Reserve means an appropriation of profits or other surpluses to strengthen the liquid resources of the business enterprise and not for meeting any liability, contingency or any commitment of the business.
It is important to understand that the business cannot create reserves in anticipation of some losses however, in case of loss, reserves can be utilized !
It is an appropriation of profits and not charged on the profits.
Importance of creating reserves in books :
- Helps in increasing working capital of the business
- A source of internal financing as profits are ploughed back into the business
- Helps in strengthening the financial position of the enterprise, since it can be used to meet any unforeseen losses that may arise in future.
