Theory question 104
Company Accounts(a) (i) Explain reserves. (ii) List two classification of reserves.
(b) State three ways in which reserves are utilized.
(c) List four examples of reserves.
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(a)(i) Reserves are amounts set aside out of profits (or arising from capital gains) and retained in the business, not to meet any known liability.
(ii) Capital reserves and revenue reserves.
(b) Any three: to issue bonus shares; to write off preliminary expenses or other fictitious assets; to write off goodwill or other intangible assets; to provide for premium on redemption of shares or debentures; to pay dividends (revenue reserves); to redeem shares or debentures; to equalise dividends.
(c) Any four: share premium; capital redemption reserve; revaluation reserve; general reserve; debenture/sinking fund reserve; profit and loss balance (retained profit); pre-incorporation profit.
Distinguish reserves (set aside from profit) from provisions (for known liabilities or losses).