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Financial accounts are often loosely referred as reserves...

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The use of the term reserve in the title of a financial statement account is not acceptable in the United States, primarily because its purpose is often too vague. However, informal use of the term by chief financial officers, analysts, and the media is common when they are discussing various aspects of acceptable accrual accounting techniques employed by U.S. firms. Provide several examples of financial statement accounts that are often loosely referred to as reserves. What is typically common about all financial statement accounts that are informally referred to as reserves?

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Solution Summary

Your discussion is 275 words (about a page) and is in everyday language suitable for a novice. Examples are given (uncollectible accounts, warranty reserves, clean up reserves).

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All account informally referred to as "reserves" are set up based on estimates. This means that the amounts will not be known for sure until future periods. For example, the allowance for uncollectible accounts. This is an account to reduce accounts receivable down to the net realizable value, the amount that will ultimately be collected in cash. The estimate must be made when the sale occurs, which is ...

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Carol Sargent, PhD
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  • MSc, University of Virginia
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