Notes on Reserve and Provision | other > Other > Reserve and Provision | KULLABS.COM

Reserve and Provision

CoVID-19 EG Scholarship

Notes, Exercises, Videos, Tests and Things to Remember on Reserve and Provision

Please scroll down to get to the study materials.

Registration open for Special Scholarships

  • Note
  • Things to remember
  • Videos
  • Quiz

Reserve

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.

Features

The followings are the features/ characteristics of reserves:

  1. It is created to meet the expected liability, strengthen the financial condition, equalization of dividends etc.
  2. It is created by debiting the profit and loss appropriation account.
  3. It is created only when there is profit in the business.
  4. It can be distributed as the dividend to shareholders.
  5. Creation of reserve depends on the financial policy of business and analysis of the management.
  6. It is usually shown on the liability side of the balance sheet.

Objectives

Reserve may by created for the following purposes:

  1. To expand business through internal sources.
  2. To strengthen the financial position of a business.
  3. To distribute the dividend uniformly over the years.
  4. To ease the replacement of fixed assets which have become obsolete or useless.

.

Provision

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:

  • Provision for bad and doubtful debts
  • Provision for repairs and renewals
  • Provision for taxation
  • Provision for discount on debtors

Objectives

Some of the important objectives of maintaining provision are as follows:

  • For meeting anticipated losses and liabilities such as provision for bad and doubtful debts, provision for debtors and provision for taxation.
  • For meeting known losses and liabilities such as provision for repairs and renewals.
  • For presenting correct financial statements
  • For reporting true profit and loss and financial position



  • A provision is the amount set aside by debiting the profit and loss account for the specific purpose. 
  • Reserve is a part of profit set aside to meet the future contingencies. Capital reserves, revenue reserves, secret reserve, etc. are examples of reserves.
.

Questions and Answers

Click on the questions below to reveal the answers

0%
  • Which one of them is not the objective of provision?

    To strengthen the financial position of a business.
    To ease the replacement of fixed assets which have become obsolete or useless.
    To expand business through internal sources.
    All the options are correct
  • Which one of them is the characteristic of reserve?

    It can be distributed as dividend to shareholders.
    It is created by debiting the profit and loss appropriation account.
    It is created only when there is profit in the business.
    All the options are correct
  • Which one of them is the objective of reserve?

    All the options are correct
    To strengthen the financial position of a business.
    To expand business through internal sources.
    To distribute the dividend uniformly over the years.
  • Which one of them is the objective of provision?

    For meeting known losses and liabilities such as provision for repairs and renewals.
    For presenting correct financial statements
    All the options are correct
    For reporting true profit and loss and financial position
  • You scored /4


    Take test again

ASK ANY QUESTION ON Reserve and Provision

No discussion on this note yet. Be first to comment on this note