Notes, Exercises, Videos, Tests and Things to Remember on Reserve and Provision
Please scroll down to get to the study materials.
Reserve is a part of profit set aside to meet the future contingencies. It is created for meeting the unexpected future liabilities and losses. Similarly, it may also be created to meet the anticipated future loss and distribute dividends uniformly over the future period of time. It simply reduces the distributable profit. Capital reserves, revenue reserves, secret reserve, etc. are examples of reserves.
The followings are the features/ characteristics of reserves:
Reserve may by created for the following purposes:
A provision is an amount set aside by debiting the profit and loss account for the specific purpose. It is maintained to meet known loss or liability the amount of which is not certain. A provision is always created for the specific purpose. It is not meant for the distribution of shareholders. The provision, in fact, reduces the figure of the business profit and not the figure of divisible profit.
Generally, a business maintains different types of provisions with some specific purposes. They are:
Some of the important objectives of maintaining provision are as follows: