Class XI Accountancy: Provisions and Reserves

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.