| Definition: | Reserve accounts are usually set up to make a balance sheet clearer by reserving or apportioning some of a business's capital against future purchases or liabilities (such as the replacement of capital equipment or estimates of bad debts).
A typical example is a company where they are used to hold the residue of any profit after all the dividends have been paid. This balance is then carried forward to the following year to be considered, together with the profits for that year, for any further dividends.
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