Advantages Of General Reserve
Major benefits or advantages of creating general reserve are as follows:
1. To Provide Additional Working Capital
General reserve provides additional working capital to the business when need. It helps to expand business activities and grab new opportunities.
2. To Meet Future Liabilities
General reserve helps to meet future liabilities and losses. So, it protects from future contingencies.
3. To Distribute Dividend
Uniformly distribution of dividend is a major challenge for the business firms. General reserve helps to equalize the dividend rate over the years.
4. To Improve The Financial Position
General reserve helps to strengthen the financial position of the firm. It helps to meet the future contingencies.
Disadvantages Of General Reserve
Major drawbacks or limitations of general reserve are as follows:
1. Does Not Show True Financial Position
General reserve is used to meet the financial loss of the business. So, financial position of the firm remains better at the time of loss also.
2. Reduce The Dividend
General reserve is created out of profit. So, it reduces the rate of dividend.
3. Questionable
It is always questionable that general reserve is properly utilized or not. There is a high chance of misappropriation of fund.
