A company unexpectedly sells a piece of land for a profit. Which type of reserve is most appropriate to classify this profit under?
Understand the Problem
The question is asking us to identify the correct accounting classification for a profit arising from the unexpected sale of land. We need to determine which type of reserve (Contingency, Revenue, General, or Capital) best fits this scenario.
Answer
Capital Reserve.
The most appropriate reserve to classify the profit from an unexpected land sale would be a Capital Reserve. This type of reserve is used for profits that are not generated from regular business operations.
Answer for screen readers
The most appropriate reserve to classify the profit from an unexpected land sale would be a Capital Reserve. This type of reserve is used for profits that are not generated from regular business operations.
More Information
Capital reserves are distinct from revenue reserves, which arise from the normal day-to-day operations of a business. Capital reserves may be used for specific purposes, such as paying dividends under certain conditions or being reinvested in the company.
Tips
A common mistake is classifying this profit as a revenue reserve, which is incorrect because the profit didn't come from regular business activities.
Sources
- Types of Reserves: Meaning and Examples - Shiksha - shiksha.com
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