Page 1 - LESSON NOTE

Class-XI

Accountancy

Topic – Provisions & Rreserves

Provisions :

1. Provision is to be made is respect of a liability, which is certain to be
incurred, but its accurate amount is not known.
2. It is charged in the Profit and loss Account on estimate basis. It should
be clearly understood that if the amount of a known liability can be
determined with reasonable accuracy, it can not a provision.

Note : Provision is a charge against profits it means provision has to be made
irrespective of business enterprise is earning enough profit or loss.

Examples of Provisisons :

 Provision for Depreciation of assets.
 Provision for Repairs and Renewals of assets.
 Provision for Taxation.
 Provision for Discount on Debtors.
 Provision for Bad and doubtfu Debts.

Reserves :

1. Reserves are the amount set aside out of profits. It is an appropriation of
profits and not a charge on the profits. The amount of profit retained is
used in the business when difficult time comes.
2. Since reserves are neither expenses nor losses, so these are not charged
to profit & loss Account rather these are debited to Profit & Loss
Appropriation Account which is prepared after Profit and Loss Account.
3. Reserves are also known as 'Ploug Back of Profits'. Reserves are created
to strengthening the financial positions of the business enterprise.
Examples are General Reserve, Dividend Equalization Reserve etc.
4. If the amount of reserve is invested outside the business then, it is called
'Reserve Fund'.
5. Creation of reserve does not reduce the net profit but only reduces the
divisible profits. General Reserves and Specific Reserves Capital
Reserves and Secret Reserves.