Provisions and Reserves — Flashcards

Answer

A provision is an amount set aside out of profits to meet a specific known liability or loss, but the exact amount cannot be determined accurately at the time of preparing final accounts. It is a char…

Answer

Provisions are created to provide for known liabilities or expected losses. They are compulsory for such liabilities and are charged against profits, so they are made even if there is no profit. This …

Answer

A reserve is an amount set aside out of profits after charging all expenses and provisions. It is created to strengthen the financial position of the business, meet future contingencies, or serve a sp…

Answer

A provision reduces net profit because it is charged to the Profit and Loss Account. A reserve reduces distributable profit after net profit is calculated because it is transferred from profit to rese…

Answer

Creating a provision is recorded by debiting the Profit and Loss Account and crediting the Provision Account. This shows that provision is a charge against profits. Format: Profit and Loss A/c Dr. To …

Answer

Creating a reserve is recorded by debiting the Profit and Loss Appropriation Account and crediting the Reserve Account. This shows that reserve is an appropriation of profit, not a charge against prof…

Answer

A General Reserve is a reserve created without any specific purpose. It is also called a Free Reserve. It is used to strengthen the overall financial position of the business and can be used for any f…

Answer

A Specific Reserve is created for a particular purpose and can be used only for that purpose. Examples include Dividend Equalization Reserve, Investment Fluctuation Reserve, Plant Replacement Reserve,…