Difference Between Specific Reserve and General Reserve
A specific reserve is a fund set aside from profits for a particular and clearly stated business purpose, such as offsetting bad debts or redeeming debentures. This concept is important in accounting, as it appears frequently in exams and is part of sound financial management for companies. Understanding specific reserves helps students excel in school exams, competitive tests, and apply the knowledge in real-world business situations.
| Type of Reserve | Purpose | Examples |
|---|---|---|
| Specific Reserve | Set aside for a clearly defined purpose | Debenture Redemption Reserve, Investment Fluctuation Reserve, Bad Debts Reserve |
| General Reserve | Set aside for unspecified future needs or contingencies | General Reserve Account, Revenue Reserve |
Meaning of Specific Reserve
A specific reserve in accounting refers to an amount transferred from profits for a specified purpose. This reserve cannot be used for any other purpose except the one for which it is created. Specific reserves ensure that funds are available to cover anticipated liabilities or meet planned expenses, making them crucial for prudent business operations.
Examples of Specific Reserve
Businesses create several types of specific reserves to meet particular objectives. Common examples include:
- Debenture Redemption Reserve – for redeeming debentures when they mature
- Investment Fluctuation Reserve – to cover losses from fall in investment values
- Bad Debts Reserve – to cover likely bad debts in future
These reserves are frequently tested in board and competitive exams. Knowing their names, purposes, and accounting entries can help students confidently answer common questions.
Sample Journal Entries for Specific Reserve
| Purpose | Journal Entry |
|---|---|
| Debenture Redemption Reserve Creation | Profit and Loss Appropriation A/c Dr. To Debenture Redemption Reserve A/c |
| Investment Fluctuation Reserve Creation | Profit and Loss Appropriation A/c Dr. To Investment Fluctuation Reserve A/c |
Difference Between Specific Reserve and General Reserve
| Basis | Specific Reserve | General Reserve |
|---|---|---|
| Purpose | For a particular use (e.g., redeeming debentures) | For any future contingency or expansion |
| Usage | Restricted to stated objective | Flexible; as per management's decision |
| Examples | Debenture Redemption Reserve, Bad Debts Reserve | General Reserve Account |
| Shown in Accounts | Under 'Reserves and Surplus' – separate line for each reserve | Under 'Reserves and Surplus' – as one sum or grouped |
Accounting Treatment and Placement in Balance Sheet
At the end of the accounting year, the amount transferred to a specific reserve is debited from the Profit and Loss Appropriation Account and credited to the relevant reserve account. Specific reserves are shown under the “Reserves and Surplus” section on the liabilities side of the balance sheet, usually with a note specifying their exact nature and balance. This treatment is standardized as per accounting rules and demanded by examiners for full marks.
Key Points for Students
- Specific reserves are created from profits, never from capital
- Their usage is limited to the original purpose
- Entries and balance sheet treatment should be clearly presented in answers
For more practical details, students can refer to the page on Accounting Treatment of Reserves for full journal entry and balance sheet examples.
Objectives of Creating Specific Reserves
- To fulfill legal or contractual obligations, e.g., debenture redemption
- To cover possible losses (bad debts, investment loss)
- To equalize dividends or stabilize business operations over years
- To ensure prudent financial management and transparency for auditors
For a broader understanding, see Reserves and Difference Between Provision and Reserve on Vedantu.
Where is a Specific Reserve Used in Real Business?
Specific reserves are common in large companies, banks, and businesses with major financial obligations. For example, before redeeming debentures, a company must set aside money in a Debenture Redemption Reserve as per law. Similarly, an Investment Fluctuation Reserve protects a company from market losses. In practical terms, these reserves ensure a company remains stable and trustworthy to investors and creditors.
Quick Revision Table: Specific Reserve
| Aspect | Specific Reserve |
|---|---|
| Definition | Amount set aside from profits for a specific, declared purpose |
| Examples | Debenture Redemption Reserve, Bad Debts Reserve, Investment Fluctuation Reserve |
| Journal Entry | Profit & Loss Appropriation A/c Dr. To Specific Reserve A/c |
| Balance Sheet Placement | Liabilities side, under ‘Reserves and Surplus’ |
To reinforce your concepts, visit Ledger Accounts, Final Accounts, and Capital Reserve for extended learning with Vedantu.
In summary, understanding specific reserves is essential for scoring in commerce exams and managing real-world business funds responsibly. These reserves are always for a clear purpose, require correct accounting entries, and are strictly regulated in their use. With Vedantu, mastering these topics becomes easier and more exam-focused.
FAQs on What is a Specific Reserve in Accounting?
1. What is a specific reserve?
A specific reserve in accounting is a fund set aside from profits for a clearly defined purpose, such as covering potential bad debts, investment fluctuations, or debenture redemption. It's different from a general reserve, which can be used for various purposes.
2. What is an example of a specific reserve?
A common example is the Debenture Redemption Reserve, created to ensure sufficient funds are available to repay debenture holders when the debt matures. Other examples include the Investment Fluctuation Reserve and the Bad Debts Reserve. These reserves are earmarked for specific purposes and are shown separately on the balance sheet.
3. What is the difference between general reserve and specific reserve?
The key difference lies in their purpose. A specific reserve is created for a single, predetermined objective (e.g., covering potential losses from bad debts). A general reserve, conversely, is a more flexible fund that can be used for various unspecified purposes such as business expansion or unforeseen contingencies.
4. What is a specific reserve in banking?
In banking, a specific reserve functions similarly to its accounting counterpart. It's a fund set aside for a specific purpose, often to meet regulatory requirements or cover potential risks associated with particular types of loans or investments. Examples may include reserves for loan losses or unforeseen economic downturns.
5. Specific reserve in balance sheet?
Specific reserves are reported under the 'Reserves and Surplus' section on the liabilities side of a company's balance sheet. They are presented separately from general reserves to provide transparency regarding their intended use. This clear presentation is important for financial statement analysis.
6. Specific reserve example?
Examples of specific reserves include:
- Debenture Redemption Reserve: Set aside to repay debentures.
- Investment Fluctuation Reserve: To absorb losses in investments.
- Bad Debts Reserve: To cover potential losses from uncollectible accounts.
7. Give two examples of specific reserve.
Two common examples are the Debenture Redemption Reserve, used to repay debenture holders, and the Investment Fluctuation Reserve, designed to offset potential investment losses. The creation of these reserves demonstrates sound financial management.
8. Write the meaning of bad debts.
Bad debts refer to outstanding amounts owed to a business that are deemed irrecoverable. They represent a loss for the company. A Bad Debts Reserve is often created to account for potential future bad debts and to smooth out the impact on profitability.
9. What is the accounting treatment of specific reserves?
The accounting treatment involves creating a separate account for each specific reserve. The creation of a reserve is recorded by debiting the Profit and Loss Appropriation Account and crediting the relevant reserve account. These reserves are then shown on the liability side of the balance sheet.
10. How are specific reserves shown on the balance sheet?
Specific reserves are displayed as part of the 'Reserves and Surplus' section within the liabilities side of the balance sheet. This separate presentation enhances transparency and allows stakeholders to understand how funds are allocated for various purposes, demonstrating good corporate governance.
11. Can a company re-purpose a specific reserve if the original reason is no longer relevant?
Generally, a specific reserve should only be utilized for its designated purpose. However, under specific circumstances and with proper board approval and disclosure, a company may be able to re-allocate or reclassify the reserve to another purpose.
12. Are specific reserves mandatory under Indian accounting standards?
While some specific reserves, like the Debenture Redemption Reserve, may be mandated by law or loan agreements, others are at the discretion of company management. The creation of these reserves depends on various factors such as business needs and regulatory requirements.
13. What is the tax treatment of specific reserves?
The tax implications of specific reserves depend on specific tax laws and regulations. While the creation of a reserve itself isn't directly tax deductible, any expenses incurred for the purpose the reserve is used for may be eligible for tax deductions. Expert consultation is advised for specific situations.
14. How does a specific reserve impact financial ratios?
Creating a specific reserve reduces the amount of distributable profits, potentially affecting financial ratios such as the return on equity (ROE) and earnings per share (EPS). It also impacts the analysis of retained earnings by providing context to how these earnings are strategically allocated for potential risks or future plans.
15. What journal entry is used to create a specific reserve?
The journal entry for creating a specific reserve typically involves debiting the Profit and Loss Appropriation Account and crediting the relevant specific reserve account (e.g., Debenture Redemption Reserve). This entry reflects the transfer of funds from profits to the designated reserve.
