Reserve Fund

The Reserve Fund is a fund, which is created by the company out of its net profits to be utilized at the time of financial stringency is called a reserve fund. It is a savings account or other highly liquid asset set aside by an individual or business to meet any future costs or financial obligations, especially those arising unexpectedly. It sets aside money for covering scheduled, routine and unscheduled expenses that would otherwise be drawn from a general fund. Reserve funds usually are set aside in an account separate from the general operating funds.

It refers to a savings account or highly liquid assets set aside to meet unexpected costs or financial obligations. If the fund is set up to meet the costs of scheduled upgrades, less liquid assets may be used. Businesses, individuals, and condominium homeowners’ associations are common users of reserve funds. For example, a homeowner’s association often manages a reserve fund to help maintain the community and its amenities using the dues paid by homeowners. It is a savings account or other liquid asset managed by a condominium, business, or individual for anticipated future expenditures, such as major repairs and improvements.

A reserve fund is a sum of money reserved for some specific future event or some emergency. It is a specific amount intended to be accumulated through periodic savings assisted by the power of compound interest. This future sum can be used to replace a piece of aging equipment. The amount to be transferred to a Reserve (or Reserve Fund) is debited to Profit and Loss Appropriation Account. Examples of Reserves are General Reserve, Capital Reserve, Dividend Equalization Reserve, Contingency Reserve, etc. The purpose of all these reserves is to enable the firm to tide over a difficult financial period and not to meet any particular contingency.