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Reserves and Provision Sumukh Rastogi 11C

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9 views9 pages

Reserves and Provision Sumukh Rastogi 11C

Uploaded by

rastogisumukh9765
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Reserves

Provisions
&
Sumukh Rastogi
11-C
Contents
01 02 03
Introduction Provisons Reserves

04 05 06
Difference Types of Reserves Secret Reserve
Introduction
The Going Concern Concept is the basis for
preparing a business’s accounts, which
assumes that the business will operate into the
foreseeable future without significant reduction
or cessation of operations. Therefore, when
calculating the annual net profit, it’s important
to consider not just current contingencies, but
also future ones. Provisions and Reserves are
examples of these considerations, which are
essentially portions of the current earnings set
aside for future requirements.
Importance
Provisions To determine Correct
Profit & loss:
To ascertain True & Fair
Financial Position:
Correct profit or loss cannot be Balance Sheet will not give a
determined unless expenses for true & fair value of the financial
the year whether paid or not position unless anticipated
Provisions are estimated amounts set are accounted. losses and expenses are
provided.
aside to cover potential expenses,
losses, or liabilities, charged to the
Profit & Loss Account. They differ from
liabilities, which are determined
amounts. Examples include provisions
for depreciation, doubtful debts, and
Prudence Concept: To maintain the
repairs.
By making a provision, a part of Capital Intact:
the profits & corresponding
Creation of Provisions is an
assets are retained, which
attempt to maintain the capital
otherwise could have been
of business intact.
distributed as profits.
• Reserve is the amount set aside out of
RESERVES & profits for a specific purpose or to
Importance strengthen the financial position.

01 Expansion of Business • Reserve is an appropriate of profits or


accumulated profits to strengthen the
02 Improvement of financial position of the business to
financial position meet a liability as and when it arises.

03 Redemption of liabilities
• Reserves are not set aside to meet an
existing liability or depreciation in the
04 Meeting unforeseen value of assets but in set aside to meet
contingencies
known or unknown contingency that
may arise in future.
TYPES OF RESERVES

REVENUE CAPITAL RESERVES


RESERVES
Revenue Reserves are set aside out of revenue
profits which are available for distribution as
Capital Reserves are set aside out of
capital profits and are normally not
dividend. available for distribution.
GENERAL RESERVES: It is a amount set aside out of
capital profits not for any specific purpose. It can be used EXAMPLES:
for any purpose as is considered appropriate such as in
the event of contingency or expansion of business.
• Profit prior to incorporation.
SPECIFIC RESERVES: It is a reserve which is set aside out
• Profit on sale of fixed assets.
of profits for a specific purpose and can be utilized only • Premium on issue of shares or
for that purpose. For eg- Workmen Compensation debentures.
Reserve is a specific reserve because it is maintained to
pay compensation to workmen.
DIFFERENCE BETWEEN RESERVE AND
PROVISION
It is the reserve the existence and/or the amount of
which is not disclosed in the Balance Sheet. It can be
SECRET said that there is a surplus of assets over liabilities and
RESERVE
ALSO KNOWN AS HIDDEN
RESERVE
that the surplus is not disclosed or shown by the
Balance Sheet.

• It increases the working capital of the concern & also strengthens its financial
position.
• The Balance Sheet will not disclose true & fair position of the business.
• It enables the directors to tide over unfavorable time.
• Heavy losses of an exceptional nature can be met without disclosing the fact in
the published statements.
• It may negatively affect market value of company’s share.
• The shareholders do not get their due share of profit from the business.
Thank you
SUMUKH RASTOGI
11-C

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