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(117)-NON STATUTORY RESERVES

Wednesday, February 24, 2010

Non Statutory Reserves

The company directors may choose to set up other reserves. These may have a specific purpose (e.g. plant and machinery replacement reserve) or not (e.g. general reserve). The creation of these reserves usually indicates a general intention not to distribute the profits involved at any future date, although legally any such reserves, being non-statutory, remain available for the payment of dividends.

Distinction between reserves and provisions

A reserve is an appropriation of distributable profits for a specific purpose while a provision is an amount charged against revenue as an expense. A provision relates either to a diminution in the value of an asset or a known liability, the amount of which cannot be established with any accuracy.

Provisions are dealt with in a company accounts in the same way as in the accounts of other types of business.

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