What is the importance of reserve in business?

1.	What is the importance of reserve in business?
Answer» The importance of creating reserve is as under: It strengthens the liquidity position for the solvency of the business. In order to meet any loss that may arise in future or to meet the future contingent loss, a reserve is maintained. Required necessary funds for expansion of the business is available from the reserve or profit of the business only. Reserve can be used to honor long term liabilities. Company can maintain dividend equalization by using reserve. Cash liquidity is to be maintained in the business by using reserve. A reserve is to provide for any known liabilities to be paid easily in future like provident fund, etc. Reserves are created to fulfil some of the statutory requirements.

Answer»

The importance of creating reserve is as under:

It strengthens the liquidity position for the solvency of the business.
In order to meet any loss that may arise in future or to meet the future contingent loss, a reserve is maintained.
Required necessary funds for expansion of the business is available from the reserve or profit of the business only.
Reserve can be used to honor long term liabilities.
Company can maintain dividend equalization by using reserve.
Cash liquidity is to be maintained in the business by using reserve.
A reserve is to provide for any known liabilities to be paid easily in future like provident fund, etc.
Reserves are created to fulfil some of the statutory requirements.

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