When any amount is kept separate by a company out of its profit for future purpose then that is called as general reserves. In other words the general reserves are the retained earnings of a company which are kept aside out of company’s profits to meet future (known or unknown) obligations. General reserves are the part of Profit and Loss Appropriation Account.
In other words the general reserve is a free reserves which can be utilized for any purpose after fulfilling certain conditions.
On the basis of above definitions general reserve may be utilized for following purposes:-
- To settle any unknown future contingencies
- To increase the working capital
- To strengthen the financial position of the company
- To pay dividends to shareholders more than specified limits
- General reserves kept to offset some specific future losses.
- General reserves includes the money kept aside for litigation or revaluation.
General reserves are shown in liabilities side of balance sheet.
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