Issued by the Committee on Accounting Procedure,
American Institute of Accountants 13 East 41st Street, New York 17, N. Y.
Copyright 1948 by American Institute of Accountants
November, 1948 No. 36
Recommendation of Committee on Terminology
Use of Term "Reserve"
The members of the committee on accounting pro-cedure have approved as an objective the recommen-dation of the committee on terminology made herein with respect to the use of the term "reserve" in ac-counting, and have authorized its publication. The statements herein contained, however, are not to be regarded as formal pronouncements of the committee on accounting procedure.
USE OF THE TERM "RESERVE"
The term reserve is used in accounting in a variety of different and somewhat conflicting senses. As a result clarity of thought and accuracy of expression are impaired and an adequate understand-ing of financial statements on the part of users is made more difficult than is necessary. In addition the variations in balance-sheet classi-fication and presentation of the so-called reserves contribute to the confusion and make comparisons difficult. It is suggested that the current uses of the term may be reviewed and that recommendations may be made as to acceptable definition and to limitations on usage which will serve to make the financial statements more readily understood.
In dealing with financial matters the term reserve is commonly used to describe specific assets which are held or retained for a specific purpose. This is the sense in which the term is employed, for instance, in our banking system, which derives its name from the fact that member banks are required to maintain deposits with the central or reserve banks. The term is also used to indicate such assets as oil and gas properties which are held for future development. These usages present no problem in accounting where the assets in question are described according to their nature or referred to as funds or deposits for specific purposes.