Reserves and surplus

This query is : Resolved

Querist : Anonymous

Querist : Anonymous (Querist)

25 November 2014 Do we have to add profit of every year to Reserves and Surplus A/c?

What will be the effect in the books of A/c?

Rupesh Jain

Rupesh Jain (Expert)
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25 November 2014 you can add profit and less the profit as the situation every year and +/- in reserve and surplus after provision of tax

Querist : Anonymous

Querist : Anonymous (Querist)

25 November 2014 Is there any effect we have to give in the books of A/c?

Aashok Kumar Sharma

Aashok Kumar Sharma (Expert)
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22 July 2025 Yes, there will be an effect in the books of accounts when you add or subtract profit to/from Reserves and Surplus. Here’s how it works:

Adding Profit to Reserves & Surplus:
Profit for the year (after tax) is transferred to the Profit and Loss Account first.

The net profit (after provisions for tax, if applicable) is then transferred from the Profit and Loss Account to the Reserves and Surplus.

In the Balance Sheet, this will show up as an increase in your Reserves and Surplus under the head Surplus or Retained Earnings.

Example Entry:
Debit: Profit and Loss Account (for the net profit amount)

Credit: Reserves and Surplus (under "Surplus" or "Retained Earnings" section)

Effect in the Books:
Increase in Reserves & Surplus: This reflects the company’s accumulated profit over time that is retained for future use, like reinvestment or to cover potential losses.

Impact on Shareholder's Equity: Higher reserves increase shareholder equity, which could positively influence the company’s financial health.

Reducing or Adjusting Reserves:
If a portion of the reserves is used for a purpose (e.g., for dividend distribution, capital expenditure, or any write-off), it is deducted from Reserves and Surplus.

Example Entry for Reduction:
Debit: Reserves and Surplus (for the amount used)

Credit: Bank or appropriate account (depending on the nature of the expense or distribution)

Important to Note:
The profit transferred to Reserves and Surplus doesn’t affect the Profit and Loss Statement directly. It only reflects the accumulation in the Balance Sheet.

Any allocation made from Reserves (like dividends) will affect the cash flow or other specific accounts, but won’t impact the Profit and Loss directly unless it's part of a provision.

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