Explain the nature of reserves and account for movements in reserves, including dividends.

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Running Header: Reserves
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Reserves
RESERVES
Nature of Reserves
Reserves are the portion of profit of the business which the companies set aside to strengthen its financial position and for meeting the growth prospects and future contingencies. They are often used for repaying debts, purchasing the fixed assets, payment of dividends, payment of bonus, or to fund expansion of the business. Reserves are the appropriation out of the profit so it reduces the amount of the profit which is available for the distribution to the shareholders of the company. If the particular company is incurring the losses than in that case no reserves are created by it.
Reserve in the company arises whenever there in any increase in equity of the company other than the increase from the contribution by the equity participants. Thus reserve is generic term which is used for all of the equity accounts except the contributed equity. They may arise out of broadly when firstly there is earnings of profits by the company i.e., the retained earnings or secondly, if there is increase in the fair value of the assets i.e., asset revaluation surplus. The share capital of the company is increased whenever there is any increase in cash flow of the company, but unlike share capital, reserves are not created out of increase in cash flows rather they are created when the company earns the profit.
There are mainly two types of reserves namely Capital Reserves and Revenue reserves. These two types of reserve are divided on the basis of nature of the profits out of which the reserves are created. Capital reserves are the reserves which are created out from the capital profits of the company i.e., the profits which the company earns from the sources other than the normal activities of the business. Normally the Capital reserves are kept aside and used for capital losses which company can incur in future and are not available for the distribution as dividend.
On the other hand Revenue reserves are the reserves which are created from...