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PROVISIONS Provision is an amount set aside, by charging it in the Profit and

Meaning ‘’A Provision is the amount written off or retained by way of providing

Concept of Provisions Accrual Assumption is a fundamental accounting assumption. It means all liabilities,

Reserves Meaning Reserves are the amounts set aside out of profits. It is an

Revenue Reserves are created out of revenue profits which are available for distribution as

Capital Reserve are created out of capital profit and are normally not available for

DISTINCTION BETWEEN REVENUE RESERVE AND CAPITAL RESERVE Basis Revenue Reserve Capital Reserve 1. Source

DISTINCTION BETWEEN REVENUE RESERVE AND CAPITAL RESERVE Basis Reserve Provision 1. Nature It is

4. Investment 5. Distribution It may be invested outside the business. Unutilized part can

6. Compulsion/ It is created as It is made out Prudence a matter of

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Welcome to Shri Krishna Education Centre Shri Krishna Education visit us at www. accountsshikshak. com

PROVISIONS Provision is an amount set aside, by charging it in the Profit and Loss Account, to provide for a known liability the amount of which cannot be determined with accuracy. It is charged in the Profit and Loss Account on estimate basis. Provision for Depreciation, Provision for Doubtful Debits, Provision for Repairs and Provision for Tax are few examples of Provisions. Shri Krishna Education visit us at www. accountsshikshak. com

Meaning ‘’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. ’’ --- Penguin Dictionary of Commerce Shri Krishna Education visit us at www. accountsshikshak. com

Concept of Provisions Accrual Assumption is a fundamental accounting assumption. It means all liabilities, losses and expense, whether ascertained or not, should be recorded in the books of accounts to determine profit or loss for the accounting period. The unascertained liabilities are recorded in the books of accounts on estimate basis which should be close to actual liability or expenses. The amount so set aside is known as ‘Provision’. Shri Krishna Education visit us at www. accountsshikshak. com

Reserves Meaning Reserves are the amounts set aside out of profits. It is an appropriation of profits or accumulated profits to strengthen the financial position of the business. It is not a charge against profits but an appropriation of profits. Reserves are not meant to cover any liability or depreciation in the value of assets. Reserve is set aside to meet known or unknown contingency that may arise in future. Examples are General Reserve, Reserve for Expansion, Reserve for Equalization of Dividends, Reserve for Increased Costs of Replacement, etc. Shri Krishna Education visit us at www. accountsshikshak. com

Revenue Reserves are created out of revenue profits which are available for distribution as dividend. Examples of Revenue Reserves are: 1. General Reserves, 2. Dividend Equalization Reserve, 3. Debenture Redemption Reserve and 4. Investment Fluctuation Reserve. Shri Krishna Education visit us at www. accountsshikshak. com

Capital Reserve are created out of capital profit and are normally not available for distribution as dividend. In other words, reserve created out of capital profits and which is not readily available for distribution as dividend among the shareholders is called Capital Reserve. Examples of Capital Reserve are: 1. Profit prior to incorporation, 2. Premium on issue of shares or debentures, 3. Profit on redemption of debentures, 4. Profit on forfeiture of shares. Shri Krishna Education visit us at www. accountsshikshak. com

DISTINCTION BETWEEN REVENUE RESERVE AND CAPITAL RESERVE Basis Revenue Reserve Capital Reserve 1. Source It is created out of business profits. It is created out of capital Profits. 2. Usage It can be used for distribution of dividends without any precondition. It can be used for distribution of dividends only if the company satisfies certain conditions prescribed by the Companies Act. 3. Purpose It is created for strengthening the financial position and meeting the unforeseen contingencies or some specific purpose. It is created for meeting capital losses or to be used for purpose specific by the Companies Act. Shri Krishna Education visit us at www. accountsshikshak. com

DISTINCTION BETWEEN REVENUE RESERVE AND CAPITAL RESERVE Basis Reserve Provision 1. Nature It is an appropriation It is a charge on of profit. 2. Purpose It is created to strengthen the financial position and to meet the unforeseen liabilities or losses. It is made to meet known liability or contingency, if the amount is not determined. 3. Effect on Profit It is debited to the Profit and Lose Appropriation Account. Hence, profit is not affected. It is debited to the Profit and Loss Account. Hence, profit is reduced.

4. Investment 5. Distribution It may be invested outside the business. Unutilized part can be distributed as dividend. It reduces divisible profits. It is not invested. It can not used for distribution as profit dividend. It reduces net profits. Shri Krishna Education visit us at www. accountsshikshak. com

6. Compulsion/ It is created as It is made out Prudence a matter of of legal prudence out of necessity. profits. 7. Presentation A reserve is shown on the liabilities side of Balance Sheet under the head ‘Reserves and Surplus. It is shown either as a liability under the head ‘Current Liabilities’ or as deduction from the asset. Shri Krishna Education visit us at www. accountsshikshak. com

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