Calculation method of legal reserve and other reserves
Legal reserve
It is a part of the net profit of each year that should be considered as a legal reserve according to Article 140 of the amendment of the Commercial Law. According to the commercial law, 5% of the company’s profit must be saved for the legal reserve every year until its amount reaches 10% of the capital. After the amount of legal reserve is equal to 10% of the company’s capital, there is no requirement to reserve more amount and it is optional.
Note: According to Article 238 of the amendment of the Trade Law, the basis of the legal calculation is the net profit after deducting the losses incurred in the years. Therefore, in a situation where the company has accumulated (annual) losses, only the net profit figure of the current year should not be used as the basis for calculating the legal reserve, but it is necessary to deduct the sum of annual losses from the net profit figure of the current year and calculate one twentieth of the excess and calculate it as legal reserve. be considered.
Other reserves:
Consideration of other reserves, such as the general reserve and discretionary reserve, is done upon the decision of the board of directors. These reserves are also considered from the net profit as approved by the board of directors.
Considering the profit of 300,000,000 riyals in the previous example and the amount of legal reserve equal to 5% of net profit and precautionary reserve equal to 10% of net profit, the corresponding accounting record is as follows:
Accumulated profit (loss) 45/000/000
Legal reserve 15/000000
reserve fund 30/000/000
Note: The basis for calculating reserves is the amount of net profit before deducting the tax reserve.
The balance of these accounts along with other permanent accounts is directly transferred to the next financial period. For this, we use the “closing balance” account. In this way, we debit all permanent accounts that have a credit balance and credit the closing balance account. Then, we debit the closing balance equal to the balance of accounts with debit balances and credit all accounts with debit balances:
Capital *
Legal reserve *****
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