Provisions and Reserves
NIOS · Class 10 · Accountancy
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What is a provision in accounting?
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…
Why are provisions created even when there is no profit?
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 …
What does the term reserve mean in accounting?
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…
How is a reserve different from a provision in terms of profit?
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…
What is the accounting treatment for creating a provision?
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 …
What is the accounting treatment for creating a reserve?
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…
What is a General Reserve?
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…
What is a Specific Reserve?
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,…
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