Considering the future, the amount set apart from the profit is known as a reserve. According to accepted business principles, reserve is the portion of profit set aside for meeting known or unknown future contingencies.

In short, the amount which is allocated from the profit for any specific purpose or without any purpose is known as reserve. This reserve is created from the Profit and Loss Appropriation Account, e.g., General reserve, Workers accident compensation fund, Investment fluctuation reserve, Dividend equalization fund, Capital redemption reserve, Debenture redemption fund, etc.

• It strengthens the liquidity position for the solvency of the business.
• In order to meet any loss that may arise in future or to meet the future contingent loss, a reserve is maintained.
• Required necessary funds for expansion of the business is available from the reserve or profit of the business only.
• Reserve can be used to honor long term liabilities.
• Company can maintain dividend equalization by using reserve.
• Cash liquidity is to be maintained in the business by using reserve.
• A reserve is to provide for any known liabilities to be paid easily in future like provident fund, etc.
• Reserves are created to fulfil some of the statutory requirements.