In financial accounting, the term reserve is most commonly used to describe any part of shareholders' equity, except for basic share capital. Sometimes, the term is used instead of the term provision; such a use, however, is inconsistent with the terminology suggested by International Accounting Standards Board

International Accounting Standards Board

The International Accounting Standards Board is an independent, privately funded accounting standard-setter based in London, England.The IASB was founded on April 1, 2001 as the successor to the International Accounting Standards Committee...

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For more information about provisions, see provision (accounting)

Provision (accounting)

In financial accounting, provision is a word that creates an ambiguous account title. In U.S. GAAP, provision means an expense, while in IFRS, International Financial Reporting Standards, it means a liability. So, in the U.S., Provision for Income Taxes means the same thing as Income Tax Expense,...

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Equity reserves are created from several possible sources:

• Reserves created from shareholders' contributions, the most common examples of which are:

• legal reserve fund - it is required in many legislations and it must be paid as a percentage of share capital

• share premium - amount paid by shareholders for shares in excess of their nominal value

• Reserves created from profit, especially retained earnings
  Retained earnings
  In accounting, retained earnings refers to the portion of net income which is retained by the corporation rather than distributed to its owners as dividends. Similarly, if the corporation takes a loss, then that loss is retained and called variously retained losses, accumulated losses or...
  
  , i.e. accumulated accounting profits. However, profits may be distributed also to other types of reserves, for example:

• legal reserve fund from profit - many legislations require creation of the fund as a percentage of profits

• remuneration reserve - will be used later to pay bonuses to employees or management.

• translation reserve - arises during consolidation of entities with different reporting currencies

Reserve is the profit achieved by a company where a certain amount of it is put back into the business which can help the business in their rainy days.