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Analysing Balance Sheet of companies

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Reserves and Surplus

Reserves are funds that are put aside for a specific reason - usually for fulfilling the future liability that can be arise.

It can be:

  • General purpose
  • Specific purpose

Negative Reserves in Balance Sheet?

Can Reseves be shown nagative in the Balance Sheet?

Yes. This is definetly possible. But this depends on a number of factors.

Accounting standards of different companies allow negative reserves for different reasons. Change in legislation of the Indian Companies Act has forced serveral Indian companies to report negative reserves because:

Negative Reserves means Accumulated Losses of the Business.

This means that the company is making loss during the year or in earlier years.

Loss erodes the reserves of the company to the extent that the reserves themselves became negative. This means that the capital itself got eroded earlier and now the reserves are getting eroded.

Prior to Schedule VI of Companies Act, 2013, Accumulated Losses were shown in the Assets Side of the Balance Sheet under the Heading - Profit & Loss A/c (Dr. Balance) but as per Schedule VI of the Companies Act. 2013, Reserves & Surplus (irrespctive of being Positive or Negative) has to be shown in the Liabilities Side of the Balance Sheet under the Heading - Reserves and Surplus heading.

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