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Why are reserves considered on the liability side on a balance sheet?

Reserves are considered on the liability side of a balance sheet because they are sums of money that have been set aside to be paid out at a future date. As these reserves don't actually belong to the company, they are not considered assets but liabilities.

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It might be strange to think of reserves as constituting a liability. After all, reserves are supposed to be a good thing. If we have reserves of money, then we have money. Shouldn't the presence of money be a boon? Shouldn't saving money be an asset?

You'd think so, but it is, nonetheless, a liability. If we think more about it, we should understand why these reserves amount to a liability.

Perhaps if we worded it differently, it'd be more clear. It's not that the reserves are a liability right now. Rather, the reserves are held in the anticipation of future liabilities.

Any given company faces a number of unexpected and unpredictable situations. Reserves help a company deal with what might come its way. For example, a global pandemic might come along making it hard for a company to continue to function and pay its employees. If that company has reserves, it can use them to keep operating and to compensate its workers.

Another way to think about reserves is in the context of a bank. A...

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