Distinguish between 'general reserve' and 'specific reserve'.
A general reserve is created when the purpose is not specified. It is also termed as a free reserve because management can freely utilise it for any purpose. It is created to strengthen the financial position of the business.
In contrast, a specific reserve is created for a specific purpose and can be utilised only for that purpose. An example is the dividend equalisation reserve, which is created to stabilise dividend rates.
The key difference lies in their usage: a specific reserve is utilised only for the earmarked purpose, while a general reserve can be utilised for any purpose, including the distribution of dividend.
Explanation
The answer draws directly from the section '7.12.2 Types of Reserves' and the 'Usage' point in the provided context. It contrasts the two based on the specificity of their purpose (unspecified vs. specific), their nature (free vs. restricted), and their utilisation (any purpose vs. earmarked purpose). The example of 'dividend equalisation reserve' is included as explicitly requested by the text for specific reserves.