In accounting, the word reserve is most commonly used to describe any part of shareholders’ equity, except for basic share capital. Sometimes, the term is used instead of term provision, however such a use is not consistent with the terminology suggested by International Accounting Standards Board. For more information about provisions, see Provision (Accounting).

Equity reserves are created from several possible sources:

Reserves created from shareholders’ contributions - the most common examples are:

legal reserve fund - it is required in many legislations and it must be paid as a percentage of share capital

share premium - amount paid by shareholders for shares in excess of their nominal value

Reserves created from profit, especially retained earnings, i.e. accumulated accounting profits. However, profits may be distributed also to other types of reserves, for example:

legal reserve fund from profit - many legislations require creation of the fund as a percentage of profits

remuneration reserve - will be used later to pay bonuses to employees or management

translation reserve - arises during consolidation of entities with different reporting currencies

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