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Friday, October 8, 2010

Reserves and Provisions


The term reserves may include the following:
  • Reserves created by means of appropriation from profit and loss account.
The reserves referred to below be voluntary reserves, the amounts transferred are at the discretion of the directors. These reserves may include following:
  1. General reserve
  2. Fixed asset replacement reserve
  3. Stock replacement reserve
  4. Debenture reserve
There is no legal restriction on the use of any of these reserves to pay a dividend to the shareholders. However, the fact that a particular company has any of these reserves implies that the directors wish funds to be kept within the business for a future purpose rather than be distributed as dividend.
  • Share premium account
  • Revaluation reserve
  • Capital redemption reserve
  • Merger reserve
  • Reserves provided for by the articles of association

The term is defined by companies act and includes:
  • Provision for depreciation or diminution in value of assets-this includes provision for depreciation, stock and doubtful debts. Such provisions are deducted from the asset heading to which they relate.
  • Provisions for liabilities or charges-amounts retained as reasonably necessary for the purpose of providing for any liability or loss which is either:
  1. Likely to be incurred, or
  2. Certain to be incurred but uncertain as to amount or date on which it will arise.
This includes provisions for redundancy and reorganization, repairs and maintenance, warranty expenditure and deferred taxation.

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