Reserves are the savings of the company that an entity use to keep in order to meet the future contingencies, even each individual either it is company man or households keep their savings for the rainy days, now the same procedure is adopted professionally in which companies use to keep their funds to fulfill the needs for future.
Reserves are maintained to meet the future loss which is not known it is unexpected, for the security to avoid any collapse in business these funds are necessary to maintained, there are different types of reserves such as reserves for accrued expenses like outstanding salaries and wages, to represent a portion of profit set aside out of available net profit for the unexpected and unknown future liabilities.
Specific reserves are kept as a provision form the profit and loss account in order to meet the anticipated expenses and contingent losses, outstanding wages, where as the general reserves are kept for the enhancement of the business, to increase the capital and make more strength able to a business.
When the Specific reserves are kept by the companies, in accounting the entries for the specific reserves are kept in the debit side of the profit and loss account before the determining of the net profit, where as when the general reserves are kept by the companies from its profit the accounting entry for that reason is to debit profit and loss appropriate account or statement of retained earnings after the net profit.
In the specific reserves the provisions are either obligatory or compulsory, the accounting entries are even in the debit side if it is a loss for the company, on the other hand creation of the general reserve is not obligatory or compulsory it is only created when the company is having a handsome profit it is not necessary for the company to create general reserve but only in profit the creation of general reserves are necessary to meet the future uncertainty.
General Reserves are the symbol of the healthy business which shows that company is having a such potential so that it can run in smooth way it represent in surplus of assets over capital and liabilities but in the specific reserves it does not represent any healthiness for the company or it does not show any surplus of asset it is just necessary for any entity.
The specific reserves are shown as the deduction from the asset in the balance sheet and the general reserves are shown on the liability side of the balance sheet.