Revenue reserve are created out of revenue profit. Revenue profits refer to the profit that is earned by operating the business. Profit on sales of goods, discount received etc. are revenue profits. There are two types of revenue reserves:
- General Reserve
- Specific Reserve
A general reserve is also known as "Free Reserve" which is created only when there is a profit or when the management desires to create. This reserve is created by setting aside a prat of the profits in order to strengthen the general financial position of the business. The aim of creating such reserve is not a specific purposes.
- To meet unknown future losses.
- To expand the business as additional working capital.
- To equalize rate of dividend over years in case of joint stock company.
- To strengthen the financial position of the business.
These reserves are created for specific or definite purposes. It must be created even there is loss. Generally, the followings are some purposes of creating specific reserves.
- To equalize the dividend over years - Dividend Equalization Reserve.
- To meet the repayment of debentures - Debenture Redemption Reserve.
- To provide funds for the replacement of assets - Reserve for Replacement of Assets.