Question about Reserves/Retained Earnings

#1
First of all, is there any difference between Reserves & Retained Earnings?

While making the balance sheet how would you calculate the increase in reserves? What other stuff is involved here other than Net Profit after Tax less dividend?
 

Alchemist

Administrator
Staff member
#2
To be honest, even I am not sure what the exact difference is.

From what I understand, reserves can be of many types and retained earnings go to the revenue reserves.

I can't think of anything else other that the dividends that need to be removed from net profit to arrive at the "increase in reserves" figure.

Of course, there are other accounting entries that affect "reserves".

Also keep in mind that "reserves" don't really mean much in the real world as they are just an accounting entry in the balance sheet.

Reserve is the profit achieved by a company where a certain amount of it is put back into the business which can help the business in their rainy days. The preceding sentence may give the unwary reader the sense that this item is an asset, a debit balance. This is false. A reserve is always a credit balance. Retained Earnings typically has a credit balance. If a firm wants to label part of Retained Earnings as a Reserve for Reinvestment, then that labeling does not harm, but neither does it do anything about making assets, liquid or otherwise, available for any day, rainy or otherwise.
https://en.wikipedia.org/wiki/Reserve_(accounting)

"Reserves" are shown on the liability side of the balance sheet because they are a "source of funds" for the company.

Reserves are not assets.
 
Top