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Reserve accounting

  • Member
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  • 179 posts
  • # 117015

What is the purpose of reserve accounting? This question is not about a reserve policy. It is a balance sheet transaction where 'retained profits' in equity section is reduced and a corresponding 'provision' added to the liabilities section.

What does this achieve. My client is saving up for a project and this transaction has been done by my predecessor. But I cannot see why he did it as the client still has to save up the money.

Thanks

Peter

PS As the client is saving, it is being put on one side. The idea is that the work will only start when they have saved enough. They will then use that money for the project so the 'provision' has even less purpose.



Edited at 02 Aug 2018 09:29 AM GMT

  • Member PM.Dip
  • Practice Licence
  • 29 posts
  • # 117017

Hi Peter

As your client is putting the money aside to pay for a project it would still be a form of equity in the business.

Would it, therefore, not be better to set up a "project reserve account" and have this in the Financed By/Equity section along with the remainder of the retained profit etc?

This would then give a truer valuation of the business rather than reducing the value of the business by the amount that has been saved up.

Once the client has saved enough for the project to go ahead the funds can then be transferred from this project reserve account in order to pay for it.

Kind regards

Gordon

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