The reserve fund includes capital components. They may be used in future to cover unforeseen expenses. The organization’s reserve fund is formed at the expense of real net profit and is reflected in the corresponding balance sheet item - 82: “Reserve capital”. Losses can occur at any time for objective or subjective reasons.
The reserve fund is capital that is formed strictly on the basis of the constituent documents of the organization and regulatory acts at the expense of funds representing part of the net profit. Information about him is an indicator of the financial condition of the enterprise. For a joint-stock company, the fund should be formed depending on the authorized capital, and replenished annually, it should be at least 5 percent of the amount of net profit. Its size can be changed in the direction of increase, if there is a corresponding resolution of the meeting of shareholders. In addition, if the authorized capital changes , then the amount of reserves decreases or increases.
A limited liability company is not legally obliged to have a reserve fund, unlike an AO, but at its discretion it can form it. These funds can be directed to the social development of the enterprise, to replenish capital, if necessary, pay dividends, as well as to unforeseen expenses associated with the onset of the crisis.
AO reserve funds may be used to cover expenses related to:
- with losses of the enterprise;
- with the need to pay dividends;
- with the liquidation of the enterprise (for payment of debt);
- with other circumstances that are enshrined in law, and regulatory documents of the organization.
The disposal of funds lies in the area of responsibility of either the board of directors or the supervisory board. If losses occur, they are directed to their repayment, in whole or in part. Cash should be kept in accessible, but at the same time reliable financial instruments. Experts do not recommend creating a large reserve fund, as this removes a significant part of the capital from the enterprise and the lost profit from their use can be quite high. These funds cannot be used in the present tense and will not bring any future income.
The reserve fund of the enterprise also implies additional capital. It includes the total amount of the increase in the property of the organization arising from the revaluation, share premium and non-current assets received free of charge and is used to cover the resulting losses.
The company also uses the concept of bad debt reserve. Its formation is due to the possibility of losses from unpaid bad or doubtful debts.
Formation of a reserve fund
Reserve funds are formed on the basis of legislatively fixed documents, so the following steps should be considered:
- First, the goals should be defined in accordance with which the funds will be distributed subsequently.
- Secondly, these goals must be included in the charter of the enterprise. It is also worth fixing the minimum size of both the fund itself and the amount of contributions to it.
- Thirdly, a meeting of the founders should be held, at which questions about changes in the amount of deductions and the procedure for their spending are decided. The meeting is recorded and certified, according to its results an appropriate order is issued.
- Fourthly, in the balance sheet of the company reflects net profit and funds allocated to the reserve fund. Further, you can perform the appropriate operations related to the expenditure or its replenishment, making the entries in the balance sheet properly.