Reserves: Meaning and Definition

Reserves

Meaning

Reserve is a part of the profits which are set aside for any known or unknown contingency, liability or diminution in the value of an asset etc. It is that portion of the current profits or of accumulated profits which is not distributed as dividend, but is kept separate for the purpose of meeting some known or unknown liabilities which might arise in the future.

Definition

Companies Act, defines Reserve as, “shall not include any amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets or retained by way of providing for any known liability”.

The American Institute of Accountant defines a reserve as, “the use of the term be limited to indicate that an undivided portion of the assets is being held or retained for general or specific purpose.”