To illustrate the concept of reserves and surplus, let’s take the example of an event management company. The company’s annual earnings from its core operation, i.e., managing events for the year 2021, were $890,000. A company’s management decided to keep aside 10% under general reserve as reserves from its earnings. If reserves and surplus were $40,000 and $20,000, respectively, at the start of the year, find out the reserve and surplus at the end of 2021.
Total earnings | $890,000 |
Opening general reserves | $40,000 |
General reserve | 10% |
Opening surplus | $20,000 |
First, calculate the general reserve,
General reserve= opening general reserve + 10% of $890,000
General reserve=$48,900
Then, calculate the surplus amount,
Surplus = opening surplus + (net profit – transfer to general reserve)
Surplus = $901,100
After getting the required values, finally calculate the value of reserve and surplus,
Reserve and surplus = general reserve + surplus
Reserve and surplus = $950,000
Therefore, the reserves and surplus for the end of 2021 will be $950,000
Meena Khan