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Definition: Reserves

‘Reserves’ refers to the share of profits that are retained in the business and not distributed to the equity shareholders. It is essentially any part of shareholders equity, exclusive of the initial capital.

In economics, the term reserve is also used to indicate some amount of money maintained as a provision. Eg. Foreign exchange reserves of a country like India

The various sources of equity share reserves are as follows:

  • Shareholders’ contribution funds, such as:

-  Legal reserves fund: As required by law, the percentage of share capital.

-  Share premium: This refers to the amount above the nominal price of the shares, paid by buyers.

  • Accounting Profits, mainly retained earnings, contribute heavily to reserves.
  • There are also other pools of reserves such as:

-   Translation reserve: Used when there are different reporting currencies.

-   Remuneration reserve: Used for bonuses etc for employees.


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