Legal Definitions - amortization reserve

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:

• Bad-debt reserve: A reserve to cover losses on uncollectible accounts receivable.
• Legal reserve: The minimum amount of liquid assets that a bank or an insurance company must maintain by law to meet depositors' or claimants' demands.
• Loss reserve: An insurance company's reserve that represents the estimated value of future payments, as for losses incurred but not yet reported.
• Policy reserve: An insurance company's reserve that represents the difference between net premiums and expected claims for a given year.
• Required reserve: The minimum amount of money, as required by the Federal Reserve Board, that a bank must hold in the form of vault cash and deposits with regional Federal Reserve Banks.

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.