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What are Reserves & Provisions? Lets understand in detail-

A
Arpita S.
02 Feb 0 0

Provisions:

There are some expenses and losses which are specific to incur, but their amount cannot be known with certainty as they are not yet incurred. It is necessary to make provision for such certain but not however born expenses/losses to determine true profit.

Some Examples of Provisions:

Provision for Bad & doubtful debts

Provision for discount on debtors/creditors

Provision for depreciation

Provision for taxation

Provision for repairs & renewals

 Let’s understand provisions with an example; generally, a businessman is sure that some of the debtors would not pay or will pay partially. To take care of such a known loss, provision for bad & doubtful debts is created.

One thing should be understood that provisions are a charge against profits/revenue. Rules are created by debiting to P/L Account.

In Balance Sheet, some provisions are shown as a deduction from the respective asset (Prov. for Bad & doubtful debts, prov for depreciation etc.) and some are displayed on the liabilities side with current liabilities (Prov. for taxation, prov. for repairs & renewals).

Reserves:

Some part of the profit is set aside to meet the future needs of a business like expansion and growth or to meet the contingencies like compensation to workers. This appropriation of profits is called as reserves. Reserves are created to strengthen the future of business.

Reserves are retention of profits for future requirements. But the creation of reserve reduces the distributable profits for owners/shareholders.

 Example of reserves:

General Reserve

Workmen Compensation Fund

Capital Reserve

Investment Fluctuation Fund

Reserve for the redemption of Debentures

Dividend Equalization Reserve

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