Depreciation, Provisions and Reserves

A reserve is created by retention of profit of the business can be for either a general or a specific purpose. . General reserve : When the purpose for which reserve is created is not specified, it is called General Reserve . It is also termed as free reserve because the management can freely utilise it for any purpose.

General reserve strengthens the financial position of the business. . Specific reserve : Specific reserve is the reserve, which is created for some specific purpose and can be utilised only for that purpose. Examples of Dividend equalisation reserve: This reserve is created to stabilise or maintain dividend rate.

In the year of high profit, amount is transferred to Dividend Equalisation reserve. In the year of low profit, this reserve amount is used to maintain the rate of dividend. Workmen compensation fund: It is created to provide for claims of the workers due to accident, etc. (iii) Investment fluctuation fund: It is created to make for decline in the value of investment due to market fluctuations.

Debenture redemption reserve: It is created to provide funds for redemption of debentures. Reserves are also classified as revenue and capital reserves according to the nature of the profit out of which they are created.