Reserves are usually divisible into two kinds – specific and general reserves. These again may be classified as either revenue reserves or capital reserves.

An essential point to note is that a reserve is not a charge to be deducted before arriving at the profit for the period under review, but it is an appropriation of profit, and a reserve account represents the fund to which part of the profits has been allocated. The reserve account will accordingly be credited as a result of a debit to the Appropriation Account, not to the Profit and Loss Account or other revenue account.

Whilts, therefore, in a broad sense all allocations to reserve represent additions to capital, some of such allocations are intended to meet commitments which are expected to arise in the future, and some are made for the purpose of premanently increasing the capital of the concern. The former are revenue reserves and the latter capital reserves.

Examples of revenue reserves are: reserves for research, development, to replace fixed assets beyond the amount of depreciation charged in the accounts, to cover possible future losses on exchange, to equalise dividends

The foregoing are specific reserves. A technology has been observed for large industrial companies tp replace a number of specific reserves by one bulk account, known simply as the General Reserve.
In a limited company the revenue reserves may, if necessary, be credited to the Profit and Loss Account. In some companies fortunes may fluctuate considerably year by year, and it is considered desirable to prevent dividends fluctuating in like manner. In such cases a dividend-equalisation fund is set up, so that by this means shareholders have a reasonably clear indication of the funds which heve been specifically allocated for the payment of dividend on their capital.

The necessity for distinguishing between capital which is held to earn income and the income itself has been emphasised in the early chapter.
Capital reserves are such as are specifically allocated to the fixed capital of the concern and are not therefore available for distribution as dividens, except in a winding-up whhen the concern is dissolved.
It is desirable that profits erising out of transactions on capital account should be placed to a capital reserve. Such profits will include profits on the sale of fixed assets, sales of investments, etc. Premiums received on the issue of shares must be credited to a capital reserve in accordance with the provisions of the Companies Act 1948.