• True and fair profit or loss of the business can be ascertained.
• On the expiry of the useful life of an asset, the managed funds (Provision) can be used to purchase new assets.
• Known liability of future can be spread evenly over certain years by making provisions.
• Assumption of going concern and principle of prudence can be followed by making provision.
• Business capital will be maintained by making provisions.
• To show the assets and liabilities of the business at correct and true value.
• To provide for future losses and expenses if amount of such losses and expenses is not determined in advance.
• Provision is made to prevent impact of transactions made during the year on the financial performance in future.

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.