Contingencies Reserve

Contingencies Reserve

Contingencies reserve

This is intended to guard against unexpected setbacks or contingencies.

Dividend equalisation reserve: The purpose of this reserve would be that, should the need arise, as in a poor year for profits, this reserve could be drawn on to meet the preference share dividend, or even to maintain the rate of ordinary share dividend.

Profit and loss account balance: This is the accumulation of profits to date which has neither been distributed by way of dividend nor appropriated to other reserve accounts.

Other revenue reserves may be created. As previously stated there is nothing to prevent transfers between the various revenue reserves but it is important, however, to realise that capital reserves cannot be transferred to revenue reserves, because, unlike revenue reserves, capital reserves are not normally free for distribution ty way of dividends.

General revenue reserves, therefore, are merely a subdivision, on paper, representing a possible use to which the revenue reserves may be put. In any case none of these items is represented on the assets side by specific cash and/or specific short-term investments, but all are for use in the business generally, and may be represented by any assets,

It will be realised, therefore, that specific revenue reserves are a funded liability, while general reserves may be an unfunded liability.

It should also be emphasised that specific reserve funds often form only a very small part of total reserves.


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