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C H A P T E R

Provisions and Reserves

MEANING OF KEY TERMS USED IN THE CHAPTER

1. Provision Provision is an amount set aside by charging it to profit 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 profit 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 profit.
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 profit not for any specific purpose.

6. Specific Reserve It is the amount set aside out of profit for a specific purpose, say, Reserve
for Expansion.

7. Secret Reserve It is a reserve which is not disclosed in the Balance Sheet.

8. Reserve Fund Amount of reserve invested outside the business, i.e., reserves against
which securities exist is termed as ‘Reserve Fund’.

CHAPTER SUMMARY

• Provision is made to meet known liability or contingent liability but the exact amount of which is not
ascertained.
• 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.
• Reserves may be (i) Revenue Reserves or (ii) Capital Reserves:
(i) Revenue Reserves are created out of revenue profits available for distribution as dividend. Examples are:
General Reserve, Debentures Redemption Reserve, Dividend Equalisation Reserve, etc.
(ii) Capital Reserves are created out of capital profits. Examples are: Profit prior to incorporation, Profit on
sale of fixed assets, etc.
• Secret Reserve: The term ‘Secret Reserve’ is applied to a reserve the existence of which does not appear
in the Balance Sheet. It is also called ‘Hidden Reserve’.