We are independent & ad-supported. We may earn a commission for purchases made through our links.
Advertiser Disclosure
Our website is an independent, advertising-supported platform. We provide our content free of charge to our readers, and to keep it that way, we rely on revenue generated through advertisements and affiliate partnerships. This means that when you click on certain links on our site and make a purchase, we may earn a commission. Learn more.
How We Make Money
We sustain our operations through affiliate commissions and advertising. If you click on an affiliate link and make a purchase, we may receive a commission from the merchant at no additional cost to you. We also display advertisements on our website, which help generate revenue to support our work and keep our content free for readers. Our editorial team operates independently of our advertising and affiliate partnerships to ensure that our content remains unbiased and focused on providing you with the best information and recommendations based on thorough research and honest evaluations. To remain transparent, we’ve provided a list of our current affiliate partners here.
Finance

Our Promise to you

Founded in 2002, our company has been a trusted resource for readers seeking informative and engaging content. Our dedication to quality remains unwavering—and will never change. We follow a strict editorial policy, ensuring that our content is authored by highly qualified professionals and edited by subject matter experts. This guarantees that everything we publish is objective, accurate, and trustworthy.

Over the years, we've refined our approach to cover a wide range of topics, providing readers with reliable and practical advice to enhance their knowledge and skills. That's why millions of readers turn to us each year. Join us in celebrating the joy of learning, guided by standards you can trust.

What is a Valuation Reserve?

Malcolm Tatum
By
Updated: May 17, 2024
Views: 7,943
Share

Valuation reserves are essentially allowances that are created by enacting a charge against earnings. The point of the creation of a valuation reserve is to help a business make use of the company’s assets in the event of come change in the value of the holdings of the corporation. The profits that find their way into this type of reserve fund can be called upon in the event that the original worth of the assets of the company are reduced for some reason.

There are a couple of very good reasons to establish and make use of a valuation reserve. One has to do with the reality of accumulated depreciation. Just about every company operates with some assets that will lose value through repeated use, or eventually become obsolete as newer equipment becomes available. Since it is a given that a state of the art piece of equipment will be old news in a few years, making use of the valuation reserve can help to minimize the impact that the incremental depreciation from the original purchase price has on the overall worth of the company. This also helps to position the company so that it becomes feasible to replace the older equipment with newer and more efficient equipment, the task can be completed with relative ease, from an accounting standpoint.

Along with the accumulated depreciation, a valuation reserve can also serve to provide for changes in the company’s assets, such as the accumulation of bad debt. Bad debt may come in more than one form. The debt may come about due to defaults on sale of equipment or other assets to a third party, and where the company is not able to regain control of the assets or equipment. Bad debts can also come about due to the failure of customers to pay for goods and services rendered.

In some cases, the cost of continuing collection efforts can exceed the amount of the outstanding debt. When that happens, many companies will simply take the loss and write it off as bad debt, thus decreasing the total value of the outstanding Accounts Receivable. By creating a charge against those earnings through the mechanism of a valuation reserve, the impact of the bad debt is partially eliminated.

Share
WiseGeek is dedicated to providing accurate and trustworthy information. We carefully select reputable sources and employ a rigorous fact-checking process to maintain the highest standards. To learn more about our commitment to accuracy, read our editorial process.
Malcolm Tatum
By Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing to become a full-time freelance writer. He has contributed articles to a variety of print and online publications, including WiseGeek, and his work has also been featured in poetry collections, devotional anthologies, and newspapers. When not writing, Malcolm enjoys collecting vinyl records, following minor league baseball, and cycling.

Editors' Picks

Discussion Comments
Malcolm Tatum
Malcolm Tatum
Malcolm Tatum, a former teleconferencing industry professional, followed his passion for trivia, research, and writing...
Learn more
Share
https://www.wisegeek.net/what-is-a-valuation-reserve.htm
Copy this link
WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.

WiseGeek, in your inbox

Our latest articles, guides, and more, delivered daily.