# Reserves and Surplus

## Meaning of Reserves

Reserves are amounts appropriated out of profits that are NOT intended to meet:

Any liability
Contingency
Commitment
Depreciation in value of assets known to exist as at the date of Balance Sheet

## Classification of Reserves

### 1. Revenue Reserves

Represent profits available for distribution to shareholders, or which may be used to:

Supplement divisible profits in lean years
Finance an extension of business
Augment working capital of business
Generally strengthen company's financial position

### 2. Capital Reserves

Reserves which are NOT free for distribution. Can be utilised only for certain limited purposes.

Examples of Capital Reserves:

Securities Premium
Capital Redemption Reserve

## Treatment of Dividends Declared After Balance Sheet Date

If dividends are declared after Balance Sheet date (but before approval of FS):

Entity should NOT recognize it as a liability as at Balance Sheet date.
Should disclose the amount of dividends declared after Balance Sheet date but before FS were approved for issue.

## Treatment of Negative Balances

Debit balance of P&L shall be shown as a negative figure under the head "Surplus".
Balance of "Reserves and Surplus", after adjusting the negative balance of Surplus, shall be shown under the head "Reserves and Surplus" even if the resulting figure is in negative.

Worked example

### Example 1

Example - Capital vs Revenue Reserve: ABC Ltd has Rs. 50 lakhs in General Reserve (revenue reserve - distributable) and Rs. 30 lakhs in Securities Premium (capital reserve - restricted use). The company can declare dividend out of the General Reserve but not from Securities Premium except through bonus issue.

### Example 2

Example - Post-BS dividend: XYZ Ltd's FY ends 31 March 2026. On 15 May 2026, Board recommends Rs. 5 crore dividend. FS are approved on 30 May 2026. The Rs. 5 crore is NOT recognized as a liability at 31 March 2026 but must be disclosed in notes to FS.

### Example 3

Example - Negative Reserves: ABC Ltd has General Reserve Rs. 10 lakhs, Securities Premium Rs. 5 lakhs, and Debit P&L (accumulated losses) of Rs. 20 lakhs. 'Reserves and Surplus' = 10 + 5 - 20 = Rs. (5) lakhs. Even though negative, it is shown under 'Reserves and Surplus' with the negative value displayed.

⚠️ Common exam mistakes

Treating capital reserves as available for dividend - they are NOT freely distributable
Recognising post-Balance Sheet date dividends as liability at BS date - they are only disclosed, not recognised
Showing debit P&L balance as a separate negative item instead of under 'Surplus'
Reclassifying negative 'Reserves and Surplus' as a 'Miscellaneous Expenditure' or similar - it stays under R&S even when negative
Confusing securities premium (capital reserve) with general reserve (revenue reserve) for distribution purposes

Reference:

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