Reserves represent the claim that owners have on a company's assets because the company has created new wealth since it began. They are typically classified into revenue reserves (e.g., retained earnings) and capital reserves (e.g., share premium).

Example/Scenario: A manufacturing company earns £1 million in profit after tax and retains £700,000 for future investments. This £700,000 is added to retained earnings, a revenue reserve that will fund business expansions. Capital reserves include amounts like share premium, which arise from issuing shares above their nominal value.