14 Questions
What is the purpose of making provisions and reserves in a business?
To protect the business from risks and uncertainties
Which of the following is considered as a provision in a business?
Provision for doubtful debts
How are provisions shown in the financial statement?
By deduction from the concerned asset on the asset side
What is the purpose of creating a provision for depreciation?
To account for the reduction in the value of fixed assets over time
Where are provisions typically shown on the balance sheet?
On the liability side, along with current liabilities
Which of the following is NOT an example of a provision in a business?
Provision for future expansion
What is the purpose of creating reserves in a business?
To strengthen the financial position of the business and meet future contingencies
Where are reserves typically shown in the Balance Sheet?
On the liability side as an appropriation of profit
What is the main difference between a general reserve and a specific reserve?
General reserve has a specified purpose, whereas specific reserve can be used for any purpose
Which type of reserve can be utilized for any purpose?
General Reserve
What is the primary source of revenue for creating revenue reserves?
Operating activities of the business
Which type of reserve is not available for distribution as dividend?
Capital Reserve
What is the impact of a provision on taxable profits?
It reduces taxable profits
Which type of reserve has no specified purpose?
General Reserve
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.
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.
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