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CHAPTER              Provisions and Reserves
                      CHAPTER

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                                  MEANING OF KEY TERMS USED IN THE CHAPTER

                       1.  Provision         Provision is an amount set aside by charging it to profits to meet a known
                                             liability, amount of which is not determined and is accounted by making
                                             best estimate.
                       2.  Reserve           It is an amount set aside out of profits to meet an unknown contingency or
                                             to strengthen the financial position.
                       3.  Revenue Reserve   It is the amount of reserve set aside out of revenue profits.
                       4.  Capital Reserve   It is the amount of capital profit transferred to Capital Reserve.
                       5.  General Reserve   It is the amount set aside out of profits not for any specific purpose.
                       6.  Specific Reserve     It is the amount set aside out of profits for a specific purpose, say, Reserve
                                             for Expansion.
                       7.  Secret Reserve or     It is a reserve the existence and/or the amount of which is not disclosed
                        Hidden Reserve       in the Balance Sheet.
                       8.  Reserve Fund      Amount of reserve invested outside the business, i.e., reserves against which
                                             investment exist is termed as Reserve Fund.

                                                  CHAPTER SUMMARY
                     •  Provision is providing for a liability the amount of which is not certain. In other words, the
                       amount provided is an estimate. Examples are: Provision for Doubtful Debts, Provision for
                       Discount on Debtors, etc.
                     •  Concept of Provision is to provide for liabilities, losses and expenses, whether the amount
                       thereof is ascertained or not.
                     •  Objective of Provision is to show correct profit or loss and liabilties and assets are shown
                       at correct values.
                     •  Reserve is an amount set aside out of profits to meet future contingencies or to strengthen
                       the financial position of the enterprise. Examples of reserves are General Reserve, Reserve
                       for Expansion, Dividend Equalisation Reserve, etc.
                       All Reserves appear on the liabilities side of the Balance Sheet.
                     •  Reserves are generally classified into:
                       (a)  Revenue Reserves and (b) Capital Reserves.
                       (a)  Revenue Reserves:  They are created out of revenue profits which are available for
                          distribution as dividend. Examples are: General Reserve, Debentures Redemption
                          Reserve, Dividend Equalisation Reserve, etc.
                           Revenue Reserves can further be classified into:
                             (i)  General Reserve and (ii) Specific Reserve.
                             (i)  General  Reserve:  This  reserve  is  not  created  for  any  particular  purpose.  It  is
                                available for any future contingencies or expansion of the business.
                            (ii)  Specific Reserves: Specific Reserves are those reserves which are created for specific
                                purpose and are utilised for that purpose.
                       (b)  Capital  Reserve:  It  is  created  out  of  capital  profits.  Examples  are:  Profit  prior  to
                          incorporation, Premium on issue of securities, Profit on forfeiture of shares, etc.
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