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Questions and Answers
What is the purpose of making provisions and reserves in a business?
What is the purpose of making provisions and reserves in a business?
- To decrease the value of assets
- To protect the business from risks and uncertainties (correct)
- To increase the taxable income
- To reduce the liabilities
Which of the following is considered as a provision in a business?
Which of the following is considered as a provision in a business?
- Provision for doubtful debts (correct)
- Decrease in current liabilities
- Retained earnings for expansion
- Increase in the value of assets
How are provisions shown in the financial statement?
How are provisions shown in the financial statement?
- By deduction from the capital account
- As an increase in assets
- As an addition to retained earnings
- By deduction from the concerned asset on the asset side (correct)
What is the purpose of creating a provision for depreciation?
What is the purpose of creating a provision for depreciation?
Where are provisions typically shown on the balance sheet?
Where are provisions typically shown on the balance sheet?
Which of the following is NOT an example of a provision in a business?
Which of the following is NOT an example of a provision in a business?
What is the purpose of creating reserves in a business?
What is the purpose of creating reserves in a business?
Where are reserves typically shown in the Balance Sheet?
Where are reserves typically shown in the Balance Sheet?
What is the main difference between a general reserve and a specific reserve?
What is the main difference between a general reserve and a specific reserve?
Which type of reserve can be utilized for any purpose?
Which type of reserve can be utilized for any purpose?
What is the primary source of revenue for creating revenue reserves?
What is the primary source of revenue for creating revenue reserves?
Which type of reserve is not available for distribution as dividend?
Which type of reserve is not available for distribution as dividend?
What is the impact of a provision on taxable profits?
What is the impact of a provision on taxable profits?
Which type of reserve has no specified purpose?
Which type of reserve has no specified purpose?
Study Notes
Provisions and Reserves in Business
- The purpose of making provisions and reserves in a business is to set aside a portion of profits for future expenses or potential losses.
Provisions
- A provision is a liability that is probable and can be estimated, such as warranty claims, lawsuits, or restructuring costs.
- Provisions are shown in the financial statement as a liability, usually under the "Provisions" or "Accrued Liabilities" section.
- The purpose of creating a provision for depreciation is to account for the decrease in value of an asset over time.
- Provisions are typically shown on the balance sheet as a non-current liability.
Reserves
- The purpose of creating reserves in a business is to set aside a portion of profits for future use, such as for expansion, modernization, or contingencies.
- Reserves are typically shown on the balance sheet as a part of equity, usually under the "Reserves and Surplus" section.
- A general reserve can be utilized for any purpose, while a specific reserve has a specified purpose, such as a dividend equalization reserve.
- Revenue reserves are typically created from revenue profits and can be utilized for any purpose.
- Capital reserves, on the other hand, are created from capital profits and cannot be utilized for distribution as dividends.
- A general reserve has no specified purpose and can be utilized for any purpose.
Impact on Taxable Profits
- A provision reduces taxable profits, as it is considered an expense.
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Description
Learn about provisions and reserves in the context of business risks and uncertainties. Understand the importance of making provisions and reserves to protect the business from adverse events.
