The difference between savings and reserves

The difference between savings and reserves

Reserves (for example, legal reserve) are amounts from a specific source (such as a proportion of capital), which must be kept separately in an account as such before the distribution of profits, in order to prevent this amount from leaving the company’s asset cycle. be made 

In addition, no specific time has been set for its release, and according to the law or the decision of the company’s shareholders, it has a specific ceiling. To create a reserve, there must be a profit, but there is no such requirement to create a reserve. 

It is important to mention that the legal reserve is considered to be 5% of the current year’s profit every year, and this practice is mandatory until the legal reserve reaches 10% of the company’s capital, and more than 10% is optional.

But the reserve is a reservoir of the realized costs that have not been paid and does not have a specific ceiling, and the decision of the company’s shareholders is not involved in determining its amount. 

In fact, reserve refers to past expenses, but reserve has nothing to do with expenses in the past. In some old books, stored, saved and accumulated were used in the same sense. 

_ The terms stored and stored are used interchangeably in many cases. However, their usage cases can be separated as follows: 

Uses of the reserve: 

Allocation and limitation of retained earnings is generally based on the proposal of the board of directors and approval of the general meeting or according to the provisions of contracts or legal requirements, and one of the reporting methods of allocation and limitation of retained earnings is to show it separately in the balance sheet. Allocation and limitation in the accumulated profit is called reserve. Such as: legal reserve, precautionary reserve (general), discretionary reserve (contractual) and so on 

Storage uses:

For asset accounts, such accounts show the identified reduction in the cost of some asset items and cause the aforementioned assets to be reflected in the net recoverable value. Such as: reserve for doubtful accounts, reserve for the decrease in value of inventories and investments. 

Note: Although accumulated depreciation is also a type of asset account, due to the difference in the type of decrease in tangible fixed assets (depreciation is not considered a decrease in the value of tangible fixed assets), the term reserve is not used in this regard.

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This post is written by mda140