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Difference Between Reserve and Reserve Fund:

Learning Objective:

  1. What is the difference between reserve and reserve fund?

  2. What are the advantages of reserve fund?

Contents:

Difference Between Reserve and Reserve Fund:

There are various types of reserves. To read a detailed article about reserves please visit our reserves article. On this page we are going to explain the difference between reserve and reserve fund.

The portion of profit that is kept in the business to increase working capital and to strengthen the financial position of the business is known as reserve.

In many cases the amount of reserve is invested out side the business in government papers or in gilt-edged securities, then it is known as reserve fund. Thus the amount of reserve which is not invested outside the business is only reserve, while reserve invested outside the business in some quickly saleable assets is called reserve fund. However, in actual practice no distinction is usually draw between the two, i.e., reserve and reserve fund are used in the same sense.

Example:

A business has earned a profit of $8,000 for the year ended 31.12.2005 and 10% of the profit is to be transferred to reserve. The entry will be:

Profit and loss appropriation a/c Dr. 800  
     Reserve a/c     800
(Being the amount of profit appropriated to reserve)      

Balance Sheet (extracts)
As at 31.12.2005

Assets $ Liabilities $
    Reserve 800
    Profit and loss appropriation a/c 7,200
       
       
       
       

If the amount of reserve is invested outside the business, there will be an additional entry:

Reserve fund investment a/c Dr. 800  
     Bank a/c     800
(Being the amount of reserve invested)      

This effect will be shown in the balance sheet as follows:

Balance Sheet (extracts)
As at 31.12.2005

Assets $ Liabilities $
Reserve fund investment 800 Reserve 800
    Profit and loss appropriation a/c 7,200
       
       
       
       

Advantages of Reserve Fund:

The following advantages are obtained from reserve fund:

  1. Regular income is earned from investment

  2. The investment having been made in Government Papers of gilt-edged securities the amount of reserve is safe.

  3. Money can be obtained by selling investments, whenever necessary.

  4. There may be a profit on sale of investments, if market price rises. There will, however, be loss if market price falls.

 

More study material from this topic:

Definition, explanation and causes of depreciation
Depreciation is not a matter of valuation but a means of cost allocation
Activity method of depreciation
Straight line method of depreciation
Sum of the years' digits method of depreciation
Reducing balance method
Annuity method
Depreciation fund method or sinking fund method
Insurance policy method
Revaluation method
Depletion method
Machine hour rate, mileage, and global method
Methods of recording depreciation
Reserves
Difference between general reserve and specific reserve
Difference between capital reserve and general reserve
Difference between reserve and reserve fund
Difference between provision and reserve

 

A D V E R T I S E M E N T

 

Financial Accounting Topics


  Introduction to Accounting
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  Transactions and Accounting Equation
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  Analysis of Business Transactions
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  Journal, Ledger and Trial Balance
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  Accounting for Bills of Exchange
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  Special Journals
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  Cash Book
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Bank Reconciliation Statement
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  Final Accounts
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  Work Sheet
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  Capital and Revenue Items
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  Valuation of Inventories
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  Accounts of Non-profit Making Organizations
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  Statement of Cash Flows
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  Accounting Ratios Analysis
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  Depreciation, Provisions and Reserves
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  Accounting Dictionary
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  Financial Calculators
 
 
 
Managerial Accounting Topics

  Financial Statements
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  Cost Volume Profit Relationship
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  Variable Costing System
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  Materials and Inventory Cost Control
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  Activity Based Costing System
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  Standard Costing and Variance Analysis
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  Balanced Scorecard
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  Capital Investment Analysis/Capital Budgeting
 

 

 

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