Date of Award

Spring 1933

Document Type



Business, Accounting & Economics


The term "reserve" has been used in a variety of different senses and perfoms a variety of different duties. In this connection Gilman says, "the word reserve, as commonly employed , has no specific meaning. It may refer to a valuation account or to an appropriation of surplus. A valuation account in a properly organized scheme of accounts should never be labeled a reserve, since we find that it is so labeled by a majority of business men and accountants, it is essential that we carefully distinguish between reserve accounts which are appropriated surplus and those which are merely offsets of asset accounts."

In a strict sense a reserve is an account with a credit balance set up because the expenses of operation have decreased an asset or credited a liability, or because It is desired to set aside part of the profits from the surplus available for dividends, or to clearly earmark an unrealized profit.

This definition indicates that reserves are of two general classes: Operating reserves, which are set up because some expense of operation must be recorded before the net profit is known; Non-operating reserves, which are not necessitated by expenses and do not indicate a deduction from profits, but merely mark a portion of the surplus as not available for dividends or record unrealized profits.

There is a great deal of difference between operating and non-operating reserves and for this reason it is confusing to call both classes reserves. It is true that both classes decrease the surplus available for dividends, but there is a difference between an operating reserve indicating that an expense has decreased the total profit, and a non-operating reserve which indicates that a temporary or permanent restriction against the use of a portion of the profits for dividends, or the earmarking of unrealized profits.

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