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Pl vs general reserve

Ankita Rathi (Article) (57 Points)

16 October 2012

Why company keeps their profit, at the year end, in profit and loss account..why don't they transfer in General Reserve? What are the benefits of doing so?

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4 Replies

Ankit (CA, CS) (3064 Points)
Replied 16 October 2012

Dear Ankit,

actuall speaking, both the terms are classified under the category of free reserves. however, every company has to under the transfer to reserves rules, transfer a certain percentage of profits to the GR

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Alok Siddapur (Consultant) (229 Points)
Replied 16 October 2012

Dear Ankita,

Under Companies Act, if in any FY, company wants to declare dividend but does not have sufficient profits during the current, it has to declare either out P&L Account or out of free reserves. If it wants to declare ourt of reserves, it has to adhere to Declaration of dividend out of Reserves Rules. Hence many companies usually keep as P&L Balance.

CA CMA Amit Patel (-) (72 Points)
Replied 17 October 2012

In order to by pass the Declaration of Dividend Rules at time of declaring the dividend.

Declaration of dividend out of Reserves Rules

Read more at: /forum/pl-vs-general-reserve-224295.asp#.UH5mZK4gXIV

CA Gopal Somani (Associate Consultant at Infosys Ltd.) (464 Points)
Replied 18 October 2012

According to companies act 1956 profit and loss anfd general reserve both are included in free reserve category, hence available for distribution of dividend. when a company declares dividend it has to transfer minimum certain percent of profit to general reserve, thus general reserve is created. company usually prefer to have P&L instead of GR because in case of insufficiency of proft if it declares dividend from reserve,then company has to follow Declaration of dividend out of Reserves Rules,1975, which limits the dividend to 10%. but if company has balance in profit and loss accounts of previous years it need not to follow Declaration of dividend out of Reserves Rules,1975..

I hope it will clarify your doubt !!