If the company does not generate profits in a year or year, it is not obliged to allocate funds to the legal reserve, because this legally required 10% is attributable to liquid profits and these cannot exist in case of losses. It is therefore very important that the company concerned makes the appropriate entries with regard to the legal reserve. In particular, when drawing up this note, the benefits obtained during the corresponding year are identified and it is then specified what is the amount corresponding to the legal reserve of 10%. In particular, all these facts and figures must be clearly indicated in the company`s accounting book. It should also be pointed out that the rest of the benefits that are not intended to fill this legal reserve item can be used, for example, for so-called voluntary reserves or for distribution among the persons in the company who have shares. Therefore, the legal reserve consists of 10%, which the company accumulates from the accounting profits it has, for example, only the net assets that the company earned from the last liquidated year is taken. In this case, the amount of $28,715.00 will be deducted from the 2019 result to increase the legal reserve, with which it will have an amount of $60,000.00, representing one fifth of the share capital of the Company. Within a company, not all reservations are mandatory. There are two categories: remember that the reserve is taken from the profits of the year, so the recording or accounting entry would look like this: The above, because it is not possible to charge more than the law has required, and the law only requires to build up a reserve of up to 50% of the share capital.
Royal Legislative Decree 1/2010 of 2 July, which approves the revised text of the Companies Act, establishes the provision for the mandatory legal reserve in Articles 274, 303, 317 and 322. As can be seen, the accumulated legal reserve of $31,285.00, a figure that still does not exceed the amount of $60,000.00, which corresponds to one-fifth of the share capital (20%), so that $28,715.00 remains to be separated from the profit. The legal reserve is the obligation for a company to keep a certain amount of profits made during a financial year. This obligation to build up reserves in the company`s financial statements must always be taken into account. In Mexico, the legal reserve is prescribed by the laws of the book “General Law on Commercial Companies”, which provides how a company must obtain at least 5% of its net capital to constitute this reserve. Taking into account a company that achieves a result of € 10,000 this year, its share capital at that time is € 50,000 and the statutory reserve of € 9,000. How much is missing for the statutory reserve of 20% of the share capital? The legal reserve is the mandatory part of the profits that must be accumulated. It is not possible, except to have compensation for negative exercises. `The losses shall be offset by the reserves set aside for that purpose and, failing that, by the statutory reserve. Reserves intended to absorb certain losses may not be used to cover other losses unless the assembly so decides. The law does not distinguish between the type or category of companies, so that whatever it is, by the mere fact that it is foreign, it must constitute the legal reserve under Article 452 of the Commercial Code.
In this article, we will focus on the mandatory legal reserve: what it consists of, what impact it has on the company`s profits, and what regulation it has introduced. The purpose of the reserve is to protect the assets of the company, so it cannot be used other than in this eventuality or eventuality. Legal reserve is a type of fund or savings that companies or corporations are legally required to create in order to protect the inheritance. This type of reserve is a subset that belongs to a broader category of reserves from companies` retained earnings and also©includes special, statutory and voluntary reserves, to name a few. The common feature of these categories is that they arise from the economic benefits of the company`s activity: that is, if this year`s result shows a positive balance. “Application of anonymous rules on legal reserves, balance sheets and profit-sharing. The company constitutes a legal reserve, subject to the rules on anonymous public access.