Reserve for Redemption of Liabilities

The firm requires to manage big amount to redeem long term liabilities like debentures. Thus, a reserve is created out of profit for the redemption of liabilities which is called reserve for redemption of liabilities.

Advantages:

1. Loan can be repaid in specific date which increases the creditability of the business.
2. It helps to avoid the financial crises of repaying liabilities.

Disadvantages:

1. It reduces the amount of divisible profit of shareholders.