What is legal reserve?

What Does legal reserve Mean

The concept of legal reserve can be used to name the assets that a financial institution must deposit with the central bank as collateral for its liabilities . The amount of said reserve varies according to each legislation, although it is usually a percentage applied to a certain concept.

Thanks to the legal reserve, bank customers have greater protection. If a bank cannot meet its obligations due to its liabilities, the legal reserve is a safe conduct for bank users to access their money.
The legal reserve is also the one that a public limited company ( company ) must have in accordance with current regulations. In some countries, the legal reserve must correspond to 10% of the company's last fiscal year profit until it reaches at least 20% of its share capital. This legal reserve is used to offset losses in the event that the firm does not have other reserves for that purpose.

That is, therefore, we could establish that the legal reserve is part of the benefit that a company in question has obtained and that has not been distributed, since it has as a clear objective both to self-finance it as well as to increase the value that it can to have.
It is therefore very important that the entity in question proceeds to carry out the corresponding entries relating to the legal reserve. Specifically, when proceeding to make said entry, the benefits that have been obtained during the corresponding year will be determined and immediately afterwards it will be made clear what is the amount of those that corresponds to the 10% legal reserve.
Specifically, all these facts and figures must appear clearly established in the accounting book that the company has. Likewise, it is necessary to emphasize that the rest of the benefits that are not directed to make up that legal reserve item, may be dedicated, for example, to what is known as voluntary reserves or to the distribution among the people of the entity who have shares .
The aforementioned voluntary reserves are, once complied with the established laws and with the possible distribution of dividends, are freely available so that the company in question can make use of them when it needs it or when it creates it. timely. Specifically, it is perfectly established that they may be used for any purpose that the leaders of the entity consider important.
The objective of the legal reserve, therefore, is the protection of the capital of the company against eventual losses. Companies cannot freely dispose of these reserves or use them for whatever they want, but their sole purpose is to respond to losses.
It is important to note that legal reserves are items created and required by law ; that is, they do not depend on the will of the employer. The latter cannot refuse to create such reserves nor is it authorized to dispose of the money according to its interests, since the mechanism is governed by specific regulations.

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