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Hello Sir,
What is difference between “Reserves” and “Retained earnings”?
What types of profits goes in “Reserves” and “Retained earnings”? Why are they kept separately?
When is transfer/reclassification between these two required?
Thanks in advance!!
Hi,
Retained earnings is a type of reserve account and is an accumulation of all the profits and losses made since incorporation of the entity.
Other examples of reserve accounts are share premium and revaluation reserves but these are now all grouped together in what is called other components of equity (OCE).
A transfer between the reserves usually arises on revaluations of PPE, whereby any excess depreciation on the revalued asset is transferred from the revaluation reserve (part of OCE) to the retained earnings.
Retained earnings and OCE are kept separately because realised gains/losses go through retained earnings and unrealised gains/losses go through OCE.
Thanks
I was confused with this thing for a long time. I am grateful for your help Sir, it is very clear now!!
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