It helps the business to become fundamentally strong and stable. This feature, in turn, becomes beneficial for the stockholders. Therefore, whenever a business makes surplus profits in a given financial year, it distributes some portion as dividends and it retains some portion in the form of revenue reserves that could be invested in the form of reinvestment. Maintenance of revenue reserves also helps in comparing the operational efficiency of the business. The revenue reserves are regarded as the indirect measure of operational efficiency. The revenue reserves are never reflected in the book of accounts as they are made up and prepared from the actual profits derived by the business. In order to check for the revenue reserves, access the liabilities section under stock holder’s equity of the balance sheet. Higher the amount, more it is beneficial for the stakeholders. Therefore, it could be stated that this amount is set aside and is generally not distributed as dividends to the end stakeholder.
Advantages of Revenue ReserveSome of the advantages are given below:
- The revenue reserves create a potential source of internal finance. This can be utilized for meeting small business requirements.
- It can be distributed to the shareholders as well in the most testing times of the business.
- It is recognized as the monetary value in real terms and simultaneously can exist in the book of accounts.
- Some portion of proceeds may be utilized to finance asset replacement requirements.
- It is also utilized to pay off short-term and high cost debt.
- It also utilized for meeting any short-term contingencies that was not visualized by the management.
- It help in gaining the confidence of the stakeholders as well. They fortify business at the very core.