Journal Entry for General Reserve

General reserve is the amount of profit that the company keeps away without a specific purpose.

Profit is the amount that company earns and remains after deducting all kinds of expenses. It is the bottom line of the income statement. Most companies will increase their profit so that they can benefit the shareholder in form of dividends or withdrawal. It is the return that shareholders expect to receive from their investment.

After the year-end closing, company summary all revenue and expense which can result in loss or profit. To start a fresh new year income statement, the profit or loss will transfer to the retained earnings on the balance sheet.

Retained earnings are the equity component of the balance sheet. It increases on the credit side of the balance sheet which aligns with the accounting equation, assets equal liability plus equity. The profit will increase the retained earning balance while the loss in the period will reduce it.

All the lifetime profit or loss will be accumulated in the retained earnings, it includes the owner withdrawal and dividend. When the company keeps making profits from year to year, the retained earnings will keep increasing as well. The only to reduce the retained earnings is through the dividend and withdrawal. When the

In some situations, the retained earnings may be separated into the general reserve to keep the capital for future use. However, they are not sure about the plan yet, so the equity is kept in the general reserve account. It is the company reserve fund that keeps in another account to meet future obligations such as contingent liability and so on. It can be used as an emergency plan in critical situations.

Journal Entry for General Reserve

Retained earnings are the equity item, so it increases on the credit side and decreases on the debit side. The company can separate the retained earnings to general reserves only when they are making a profit continuously. The profit keeps accumulated in the equity section. It is not practical to record reserves when company is making an accumulated loss (positively retained earning).

The company simply decreases the retained earnings and increases the general reserve which is another account under the equity section.

The journal entry is debiting retained earnings and credit general reserve.

It is just the movement of equity from one account to another. Both retained earnings and general reserve are under the equity section of the balance sheet.

Journal Entry for General Reserve Example

ABC is a trading company, during the last decade the profit rapidity. The total retained earnings increased to $ 100 million. The company has expanded its operation to every state and other countries as well. At the same time, they make a good dividend to the shareholders. On 01 July, the board of directors decided to keep $ 10 million as the general reserve for the unexpected obligation. Please prepare journal entry for general reserve.

When the company separated its total earnings into the general reserve, it will decrease the retained earnings in the general reserve account.

The journal entry is debiting retained earning $ 10 million and credit general reserve $ 10 million.

The transaction will increase the general reserve by $ 10 million on the balance sheet while decreasing the retained earnings.