A reserve is an allowance that is set aside for expected losses. For example, a business could create a reserve for bad debts or obsolete inventory that has not yet been specifically identified. A reserve may also be used to set aside a portion of a firm’s retained earnings, which signals to investors that the company plans to use the funds for specific future purposes, such as the purchase of fixed assets or an expansion into a new geographic region, rather than paying out the funds as dividends.