Accounting treatment of general purpose contingency reserves;

              Accounting Research
July, 1947
No. 28
BULLETINS
Accounting Treatment of General Purpose Contingency Reserves
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Issued by the Committee on Accounting Procedure, American Institute of Accountants,
270 Madison Avenue, New York 16, N. Y.
Copyright 1947 by American Institute of Accountants
INTRODUCTION
1. Accounting for reserves and their presentation in financial state-ments involve problems that are both numerous and complex. Since complete solution of all the relevant problems has not been consid-ered possible at an early date, the committee has deemed it wise to separate the problems for individual treatment. The first steps were taken when the committee dealt with reserves arising out of the war.1 As another step, consideration is given in this bulletin to general contingency reserves which may be set up by management but which are not required at the time under generally accepted accounting principles and whose purposes are not specific. The committee has left for future consideration and possible definitive treatment many aspects of reserves including inventory reserves, reserves for specific but undisclosed contingencies, and the general use of the term "reserve" in financial statements. These are now being studied by the committee.
2. The purpose of the committee in the issuance of this bulletin is to establish criteria which will promote sound accounting proce-dures for the treatment of general contingency reserves and lead to greater uniformity in reporting net income. The committee believes the action taken in this bulletin is in accordance with the current trend of accounting thinking and practice. In reaching this conclusion consideration has been given to the declining use of general purpose contingency reserves as charges to income and to the general recognition that their use may either arbitrarily reduce income or be the means of shifting income from one year to another.
3. When a reserve is provided by a charge to income, the amount recorded as net income for the period is correspondingly reduced. If the provision is not properly chargeable to current revenues, net
1 DISCUSSION
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