Accounting Procedures for a Reserve Account

The general ledger contains numerous accounts that have a specific use. A reserve account is one such financial account. Companies maintain reserve accounts for many purposes, though most reserve accounts are for debt service or maintenance. Accountants must maintain these accounts accurately to report these amounts to internal and external stakeholders.

A reserve account holds information that relates to a specific cash amount. This account is separate from the company’s operating cash balances. The purpose of the reserve account is to set aside money that won't be used for normal business purposes. Multiple reserve accounts may be common in large organizations that have many loans that require debt payments. Reserves are common so a company can retain money for future purposes.

Accountants typically post journal entries to record the placement of cash into a reserve account. The standard entry will debit the reserve account and credit the operating cash account. In some cases, a company may need to set up a bank account for the reserve account. The bank account receives deposits from the operating account or other sources. Accountants need to reconcile the reserve account to ensure all the information is accurate in the general ledger.

The balance sheet reports all assets in a business. A reserve account is an asset. The account falls under the current asset section of the balance sheet. The accounts often occupy a place just underneath the operating cash account. Cash accounts come first in the current asset section because these are the most liquid assets in a business. The account balance reported should match the bank account balance reported on statements sent from the financial institution.

Companies may need to issue disclosures that inform stakeholders of the use of reserve accounts. Stakeholders typically need information on why a company is setting aside cash from operational uses. The disclosure can simply report the need for a reserve account, monies set aside each month and the eventual use of the funds. Procedures for reconciling and handling any overages may also be in the disclosure statement.