A reserve (reserve account) that an entity creates out of its profits for a certain purpose. It is usually appropriated out of retain earnings in order to meet future obligation, known and determined at the time. As the name implies, a specific reserve is set aside for a “specific” purpose and can be only used for that purpose in the future, usually including a bad debt reserve, dividend equalization reserve, investment fluctuation reserve, and so on.
By nature , a specific reserve is a capital or a equity account. It appears in the statement of financial position (balance sheet) under liabilities and owners’ equity side (the right sided section of the statement).
The double entry for creation of a specific reserve is:
Profit & loss (or retained earnings) – Debit
Specific reserve – Credit
The other main type of reserves is called a general reserve (which is created for a general purpose).
A specific reserve is also known as a special reserve.
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