This GSEB Class 11 Commerce Accounts Notes Part 2 Chapter 3 Provisions and Reserves covers all the important topics and concepts as mentioned in the chapter.
Provisions and Reserves Class 11 GSEB Notes
As human life is full of many uncertainties, a business also has to face many types of risks and uncertainties. Many types of certain and uncertain risks come across a business but if proper planning is done for such contingencies in advance, then the business can overcome economic/monetary problems during the critical period, easily and safely. Profit becomes a very important base for such planning. It means, in order to save the business from such risks and uncertainties, it is necessary to make provisions of funds and reserves. Every year a sum is set aside out of the revenue profits and transferred to an account which is known as a reserve or a provision. American Institute of Accountants has defined as follows :
“The use of the term reserve be limited to indicate that an undivided portion of the assets is being held or retained for general or specific purpose.”
→ Provision means an amount appropriated from profit to honor probable liabilities which can be identified but the amount of which cannot be ascertained accurately.
→ Provision is appropriated from Profit and Loss Account.
→ An amount appropriated out of profit to increase financial soundness of the business or to meet with contingent loss or liability in future is called as Reserve.
→ Reserve is appropriated from Profit and Loss Appropriation Account.
→ There are two types of reserves :
- Revenue reserve and
- Capital reserve.
→ There are three types of Revenue reserve :
- General reserve
- Specific reserve and
- Secret reserve.
→ Reserve is a helping hand for business in contingencies. It means reserve is like an anchor during bad times.
→ There is no definite purpose for creating the General reserve.
→ When a Revenue reserve is created out of Profit and Loss Appropriation Account for specified purpose is known as Specific reserve.
→ Specific reserve is used for the same purpose for which it is created while General reserve can be used for any purpose.
→ The reserve created without showing in profit and loss account for the purpose of strengthening financial position of the business is known as Secret reserve.
→ Secret reserve is also known as Internal reserve but it is not advisable to create for business.
→ The reserve which is created out of capital profit and cannot be used for distribution of dividend is known as Capital reserve.
→ When the amounts of reserve is invested in securities outside the business, it is known as Reserve fund.