In insurance, Valuation reserve is basically allowances that start by enacting a charge contrary to earnings. Valuation reserve is created to help a company used its assets in the event that the value of the corporation’s holdings will change. The profits of the company that results to this kind of reserve fund can be considered when the worth of the assets of the corporation are reduced or lessen for some reasons. There are a couple of good reasons why a company should use valuation reserve. One reason is because of accumulated depreciation, which is determining the current or present net worth of a particular asset. Where in it consider the actual purchase price up to the current level of the investment.
Every company operates with assets that will eventually lose its value because of the repeated use, and eventually no loner be used because of the new equipments that will be available. Therefore, the use of valuation reserve is helpful because of the fact that equipment will become old in the coming years. This will help minimize the incremental depreciation impact from the actual purchase price on the overall worth of the corporation. Furthermore, valuation reserve helps to position the corporation or company so that it will be feasible to buy new and more efficient equipment in replacement of the older one. The task can be done through an accounting standpoint with ease.
Together with accumulated depreciation, a valuation reserve can also provide changes in a corporation’s assets, such as gathering bad debts. Bad debts may come in many forms. It may come due to failure in the sales of the equipment or other assets to another company. Moreover, bad debts can also be in a form of failure of other customers to pay for the goods and services rendered to them. This goods and services can be tangible or intangible goods that are produced to fulfill the customer’s needs and purchase orders. Goods and services are simultaneously offered. An insurance company holds in a valuation reserve against a life insurance policy with an amount that requires more funds than what is expected; may it be a liability or case assets.
A valuation reserve amount is determined by identifying an insured person’s age, sex, how long the questioned policy has been in force, and the interest rates that are used in calculations. Valuation reserve is also called “valuation account”. In other cases, the amount of the continuing collection can goes beyond the cost of the existing debt. When this condition occurs, most companies will take the loss and treat it as a debt. Therefore, it lessens the total amount or value of the existing Accounts Receivable.
Accounts Receivable is one of the basic needed in a business, it a mean of keeping up the money owned by the customers or clients as well as keeping track of the money that was received from the clients. The impact of bad debt can be partly eliminated by using valuation reserve as mechanism.