Learn Accounting Entries For Contingency Or General Reserve On Your Own:

Contingency Or General Reserve Or Contingent Liability is one that doesn't currently exist, but might exist in the near future if an event or events occur. The fund is maintained cash or some kind of asset/assets reserved to meet unforeseen circumstances or losses in a business. The main purpose of contingency fund is to maintain or improve a financial stability of the concern that can be resorted to in emergency.

Contingency fund can also be used to cover up product warranty, guarantee given against loan or major business expenditures such as expansion, diversification, up gradation of equipments. Maintaining contingency fund gives the concern the flexibility to meet emergencies with little or without disrupting its routine expenditures.

In business, it can also be used to reduce the need to take out high-interest loans.

Even in the day to day life of a normal person, contingent liability has an important role to play. Some amount of money is kept aside at home to meet emergencies. When his child demands for toys, his reply might be "I don't have money now; may be next month" Ok! But if the child meets an unfortunate accident the very next moment, the parent will have the money to meet the unforeseen expense. Now this money used has come from contingent liability which was steadily maintained.

Budgeting For Contingency Fund:

Every company needs to develop its contingency fund budgeting based on its individual needs. Depending on the nature and needs of industry, it can require, varying from 10% to 20% of its budget to be set aside as a contingency fund. These funds set aside protect the concern from unforeseen expenses and ramps up its cash flow in the early stages of business development.

Journal Entries For General Reserve Or Contingency Account:

For Transferring The Amount Of Profit To Contingency Account / General Reserve Account:-

Profit & Loss A/c---------------------------------Dr

            To General Reserve a/c

(Being amount transferred to general reserve account)

For Absorption of Loss/Unforeseen Expenditures:-

General Reserve A/c ---------------------------------Dr

            To Profit and Loss A/c

(Being the amount of loss transferred to contingency reserve.)

Journal Entries For Adjusting Reserve Or Other Accumulated Profits:

The balance of general reserve represents accumulated profits or balance in the profit and loss account and should be distributed among the old partners in the old profit sharing ratio.

The accounting entry will be:

Profit and Loss A/c---------------------------------Dr.

General Reserve A/c --------------------------------- Dr.

            To Old Partners Capital A/c

(Being the amount of profit shared between the old partners in the old profit sharing ratio)

Again, it may be desired to keep the Reserve and Profit and Loss A/c undisturbed, in that case the following entry may be passed:

All Partners Capital A/c ---------------------------------Dr. (in the new ratio)

            To Profit and Loss A/c

            To General Reserve A/c

(Being the amount of profit shared between all partners in the new profit sharing ratio)