TANEJA CLASSES

DSS 146, SECTOR 7, MAIN MARKET, KARNAL

Worksheet Name: Ch-17 Standard: 11th Commerce Subject: Accountancy

Instructions
1. Attempt all questions

Q1. Provision is a:
A Specific Reserve. B General Reserve. C Capital Reserve. D None of these.
Ans: D None of these.
Q2. Which of the following is a correct distinction between a Revenue reserve and a Capital reserve?
A A revenue reserve is created out of capital profits whereas B A revenue reserve can be used for distribution of dividend
a capital reserve is created out of business profits. with certain preconditions whereas a capital reserve can be
used for distribution of dividend without any preconditions.
C A revenue reserve is created for strengthening the financial D There is no distinction between revenue reserve and capital
position whereas capital reserve is created for meeting reserve.
capital losses or to be used for purposes specified by the
Companies Act.
Ans:
C A revenue reserve is created for strengthening the financial position whereas capital reserve is created for meeting capital losses or to be
used for purposes specified by the Companies Act.
Q3. Which of the following statements are correct about a “Provision”?
1. Provisions are a charge against the profits of an enterprise.
2. Provisions are created out of divisible profits.
3. Creation of provisions are not necessary for a business.
4. Provisions are created to meet a known liability.
A (ii) and (iii) B (ii) and (iv) only C (i), (iii) and (iv) D (i) and (iv) only
Ans: D (i) and (iv) only
Q4. If the amount of any known liability cannot be deterinined accurately.
A Provision should be created. B Definite liability should be created.
C Reserve should be created. D Should be shown as a contingent liability.
Ans: A Provision should be created.
Q5. A Provision is:
A An appropriation of profits. B A charge against profit.
C Can be (a) or (b). D None of these.
Ans: B A charge against profit.
Q6. Which of the following is a correct difference between a provision and reserve?
A A provision is created out of a legal necessity whereas a B A provision is invested whereas reserve is not invested.
reserve is created as a matter of prudence.
C A provision is an appropriation of profit whereas a reserve D A provision can be used for distribution of dividend
is a charge against profit. whereas a reserve cannot be allowed to be used for
distribution of dividend.
Ans: A A provision is created out of a legal necessity whereas a reserve is created as a matter of prudence.
Q7. If the amount of any known liability cannot be determined with accuracy:
A A liability should be provided. B A provision should be made.
C A reserve should be set aside. D None of these.
Ans: B A provision should be made.
Q8. If the amount of any known liability can be determined with accuracy:
A A liability should be provided. B A provision should be made.
 C A reserve should be set aside. D None of these.
Ans: A A liability should be provided.
Q9. Profit on sale of fixed asset is used to create:
A Specific Reserve. B General Reserve. C Capital Reserve. D None of these.
Ans: C Capital Reserve.
Q10. Which of the following statements is not appropriate in relation to “Provision”?
A Provision is a charge against profit. B Provision is created for known liability.
C Provision is created for strengthening the financial position D Creation of provision satisfies the principle of conservatism.
of the business.
Ans: C Provision is created for strengthening the financial position of the business.
Q11. Reserves arising from capital receipts are known as:
A Capital Reserve. B Reserve Fund. C Any of (a D None of these.
Ans: A Capital Reserve.
Q12. Provisions are:
A External transactions. B Internal transactions. C Can be (a) or (b). D None of these.
Ans: B Internal transactions.
Q13. _____ are created in business for rainy day.
Ans: General Reserve.
Q14. _____ are created out of capital gains.
Ans: Capital Reserve.
Q15. _____ are created for specific purpose.
Ans: Specific Reserve.
Q16. If the amount of a known Liability can be ascertained with accuracy, it should be treated as a Liability or a Provision. Comment.
Ans: It should be treated as a liability and not a Provision.
Q17. What is dividend equalisation reserve?
Ans: Dividend equalisation reserve: Such a reserve is created to maintain steady rate of dividend. In the years in which the profits are
sufficient, a part of the profit is transferred to such reserve and it is utilised to keep the dividend up in the year in which the profits are
insufficient.
Q18. Give one difference between General Reserve and Specific Reserve.
Ans: 1. General Reserve: is the amount set aside out of profits not for any specific purpose. It is available for any future contingency or
expansion of business. Such reserve strengthens the financial position of the business. Example is General Reserve.
2. Specific Reserve: is that reserve which is set aside out of profits for a specific purpose and can be utilised only for that purpose. For
example, Workmen Compensation Reserve is a specific reserve because it is maintained to to workmen. Debentures Redemption
Reserve, Capital Redemption Reserve, Investment Fluctuation Reserve, etc., are other examples of Specific Reserve.
Q19. Is Reserve a charge against profit or an appropriation of profit? Discuss.
Ans: Reserves is an appropriation of profits or accumulated profits to strengthen the financial position of the business. Reserves are not set
aside to meet a liability or depreciation in the value of assets but is set aside to meet known or unknown contingency that may arise in
future. Examples are General Reserve, Reserve for Expansion, Reserve for Equalisation of Dividends, Reserve for Increased Costs of
Replacement, etc.
Q20. What is a Capital Reserve? How is it different from a Revenue Reserve?
OR
Distinguish between 'Revenue Reserve' and a ‘Capital Reserve' on the basis of:
1. Source of creation.
2. Purpose.
3. Usage.
Ans: Difference between Revenue Reserve and Capital Reserve Basis
S.n Basi
Revenue Reserve Capital Reserve
o. s
Sou
1. It is created out of business or revenue profits. It is created out of captial profits.
rce
 It can be used for distribution of dividents only if the co
Usa It can be used for distribution of dividents without any
2. mpany satisfies certain conditions prescribed by the Co
ge precondition.
mpanies Act.
Pur It is created for strengthening the financial position an
It is created for meeting capital losses or to be used for p
3. pos d meeting the unforeseen contingencies or some specif
urpose specified by the Companies Act.
e ic purpose.
Q21. Distinguish between Provision and Reserve on the following basis:
1. Basic Nature.
2. Purpose.
3. Effect on Taxable Profit.
4. Presentation in Balance Sheet.
5. Element of Compulsion.
6. Use for Payment of Dividend.
Ans: S.n
Basis Reserve Provision
o.
1. Nature It is an appropriation of profit. It is a charge against profit.
It is created to strengthen the financial position an It is made to meet know liability or contingency, wh
2. Purpose
d to meet unforeseen liabilities or losses. en amount is not determined.
Effect on Pro It is debited to the profit and loss appropriation acc It is debited to the profit and loss account. Hence, p
3.
fit ount. Hence, profit is not affected. rofit is reduced.
Unutilised part can be disturbed as dividend. it red It cannot be used for distribution as profit/ dividen
4. Distribution
uces divisible profits. d. it reduces net profits.
Complusion/ It is created out of profits as a matter of prudence a It is made becaue of accounting principles (Prudenc
5.
Prudence nd due to legal requirements. e).
A reserve is shown on the liabilities side of balance It is shown either as a liability under the head 'Curr
6. Presentation
sheet under the head 'Reserves and Surplus'. ent Liabilities' or as deduction from the asset.

Q22. Give any four points of distinction between Provisions and Reserves.
Ans: Difference between Reserve and provision:
Basis Reserve Provision
1.Nature It is an appropriation of profit. It is a charge against Profit.
It is created to strengthen the financial position and It is made to meet known liability or contingency, w
2.Purpose
to meet unforeseen liability or losses. hen amount is not determind.
Effect on pro It is debited to the profit and Loss Appropriation Acc It is debited to the profit and Loss Account. Hence, p
3.
fit ount. Hence, Profit is not affected. rofit is reduced.
4.Investment It may be invested outside the business. It is not invested.
Unutilised part can be distributed as dividend. It red It cannot be used for distribution as profit/ dividend.
5.Distribution
uces divisible profit. It reduces net profits.
Compulsion/ It is created out of profits as a matter of prudence a It is made because of accounting principles (prudenc
6.
Prudence nd due to legal requirements. e).
A reserve is shown on the liabilities side of Balance It is shown either as a liability under the head 'Curre
7.Presentation
Sheet under the head 'Reserves and Surplus'. nt Liabilities' or as deduction from the asset.

Q23. Define provision. What is the importance of creating a provision? (any three points of importance).
Ans: “A Provision is the amount written off or retained by way of providing depreciation, renewals or diminution in the value of assets or
retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy."
Importance of Provision:
1. Provision is an amount set aside out of current earnings considered necessary to provide for all losses that are expected to arise out
of transactions entered into, during the accounting period.
2. Provision is made to retain future operating performance undisturbed by losses arising out of transactions of prior periods.
3. Provision is made following the Prudence Concept of accounting which holds “provide for all anticipated expenses and losses but do
not provide for anticipated incomes." By making a provision, a part of the profits and corresponding assets are retained, which
otherwise could have been distributed as profits.
4. Any loss or depletion in the value of an asset or any liability as may not have been provided against income or profit would effectively
erode the capital of a business. Creation of Provisions is an attempt to maintain the capital of business intact.