Specific Reserve Study Notes for Competitive Exams in Detail

A specific reserve is a financial provision created by a business or organization for a particular, predefined purpose, rather than being part of general or retained earnings. This type of reserve is established to earmark funds for a specific, anticipated future expenditure or financial obligation. It plays a crucial role in financial management, helping businesses prepare for expected or unexpected events and ensuring the availability of funds when needed. In this discussion, we will explore the concept and significance of specific reserves, their creation, utilization, and some frequently asked questions related to them.

Specific Reserve is a vital topic to be studied for the commerce related exams such as the UGC-NET Commerce Examination.

In this article the readers will be able to know about the specific reserve in detail along with some other related topics as well.

What is a Specific Reserve?

In the realm of business accounting, specific reserves hold a significant place. These reserves are set aside for a predetermined purpose and cannot be used for anything else. However, under certain circumstances and with the permission of the articles of association and the board of directors, these reserves may be allocated for other purposes.

Specific Reserves Example

To get a better understanding, let's look at some examples of specific reserves:

• Capital Redemption Reserve: This reserve is created to redeem the company's preference shares. During high-profit periods, part of the profit is set aside in the Capital Redemption Reserve account. This reserve is then used to pay for share redemption during low-profit periods.

The creation of the Capital Redemption Reserve involves the following journal entry:

Profit and Loss Appropriation A/c Dr.

To Capital Redemption Reserve A/c

• Contingency Reserve: This reserve is created to cover unexpected future expenses or losses. The amount transferred to this account is invested in secure assets that can easily be liquidated in case of need.

The Contingency Reserve is created by passing the following journal entry:

Profit and Loss Appropriation A/c Dr

To Contingency Reserve A/c

• Workmen Compensation Reserve: This reserve is set up to meet the potential future liability of compensating workers for injuries sustained during employment. This reserve is created by setting aside a portion of the company's profits.

The Workmen Compensation Reserve is created by passing this journal entry:

Profit and Loss Appropriation A/c Dr.

To Workmen Compensation Reserve A/c

Why Create Specific Reserves?

Here are some of the reasons for creating specific reserves:

• To cover expenses related to outstanding liabilities.
• To write off losses from depreciation.
• To cover potential contingencies like bad debts, doubtful debts, or investment fluctuations.

Difference Between General Reserve and Specific Reserve

Conclusion

Specific reserves serve as a strategic financial tool that allows businesses to set aside funds for specific, anticipated purposes. They provide a level of financial security and help companies prepare for future financial obligations, whether they are known or unforeseen. Establishing and maintaining specific reserves is a prudent financial practice that contributes to the overall stability and sustainability of an organization. These reserves provide a cushion against unexpected financial challenges and ensure that a business can meet its commitments as they arise. By understanding the purpose and importance of specific reserves and following prudent financial management practices, businesses can navigate the complexities of financial planning with confidence.

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