Sunday, June 3, 2012

Calculate Accounting Reserve Capital

What are considered a company's accounting reserves?

Generally, A company’s share capital remains fixed at the same rate from year to year, unless new shares are issued to new shareholders.  Reserves are difficult to calculate because different types of eserves arise for different accounting reasons. Use the following equation to calculate accounting reserves.

Accounting Reserves Equation = Net Assets – Share Capital 

The total amount of reserves in a company will vary often and is very dependent on the overall net assets of the business.   To further complicate the matters, there are several different types of reserves:

Statutory Reserves = Accounting reserves which a company is required to set up by law. For example banks might have to certain statutory reserves to insure that they are able to satisfy depositors demands. There almost might be a certain type of reserve required for the distribution of dividends.

Non statutory reserves = A type of reserve that consists of profits which are distributable dividends. However, there is nothing requiring the company to distribute these dividends. The company is free to chose when it wants to distribute dividends.

Equity reserves are created from several possible sources: 

  • Reserves that are created from shareholders' contributions, i.e. buying stock
  • Reserves created from profit, especially retained earnings, i.e. accumulated accounting profits that the company 

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