Simple English definitions for legal terms
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An amortization reserve is a type of account used for bookkeeping purposes to gradually pay off a debt over time. It is like setting aside money each month to pay off a loan. Other types of reserves include a bad-debt reserve, which covers losses on uncollectible accounts, and a legal reserve, which is the minimum amount of money a bank or insurance company must keep on hand by law to meet customer demands.
An amortization reserve is a type of reserve account created for bookkeeping purposes to gradually extinguish an obligation over time. It is often used in accounting to spread out the cost of an asset over its useful life.
For example, a company may purchase a piece of equipment for $10,000 that has a useful life of 5 years. Instead of recording the entire cost as an expense in the year of purchase, the company can create an amortization reserve and gradually reduce the value of the asset over the 5-year period. This allows the company to more accurately reflect the true cost of the asset over its useful life.
Other types of reserve accounts include:
Overall, reserve accounts are used to set aside funds for future obligations or losses. They help companies and organizations manage their finances and ensure they have enough resources to meet their commitments.