8/13/2019 6f418Accounting for Management Lecture 14 Provisions & Reserves

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Amity Business School

Amity Business School MBA Class of 2015,

Semester I

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Amity Business School

Provisions

According to The Indian Companies Act,provision can be defined as any amount.written off or retained by way of providing fordepreciation , renewal diminution in the valueof assets or retained by way of providing forany known liability of which the amountcannot be determined with substantialaccuracy.

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Provisions1. It is created by debiting the profit and loss account.

2. It is created to meet a known liability or a specific contingency, e.g.. provision for bad and doubtful debts, or provision for depreciation etc.

3. A provision is created irrespective of whether there is profit or loss in thbusiness.

4. It is not available for distribution as dividend among shareholders.

5. A provision is made for a definite amount and, therefore, a definite sumis set aside every year to meet the known contingency.

6. Making of a provision is a must to meet known liability or contingency.

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ProvisionsThus provisions are the amounts set aside out of profits

and other surpluses to provide for:-1. Depreciation, Renewals or diminution in the value

of assets2. Any known liability of which the amount cannot be

determined with substantial accuracy.

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ProvisionsProvisions are generally created for the following:-1. Provision for Depreciation

2. Provision for Bad and Doubtful Debts3. Provision for Discount on Debtors4. Provision for taxation5. Provision for Repairs and Renewals

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Reserves

This term means amount set aside out of profitsand other surplus which are not designed to

meet any liability or diminution in value ofassets known to exist at the date of B/S.

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ReservesBasic purpose of creating a reserve is to provide for unexpected losses in future and also retain

profits within business to provide funds forexpansion of the business.

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Amity Business School

Reserves1. It is created by debiting the profit and loss appropriation account.2. It is created to meet an unknown liability, or to strengthen the financial

position of the company or for equalization of dividends etc.3. A reserve is created only when there is profit in the business.4. It can be distributed among shareholders as dividend.5. The reserve is created without taking into consideration the actual

amount required except in the case of redemption of debentures when adefinite sum is set aside.

6. Creation of reserve depends upon the financial policy of the business andiscretion of its management.

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Reserve Fund

The term Reserve Fund is used for the amount ofreserve which has been invested in outside securities.

Examples of Reserve Fund are employees welfare fund, pension fund, gratuity fund etc.

Profit set aside and used in the business is a reserve.But profit set aside and invested outside the business

is a reserve fund. Thus, the use of the term 'fund'indicatesinvestment of reserve outside the business.

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