Dear Teachers,

​

These slides have been prepared based on the NCERT syllabus to support you in teaching Plus One and Plus Two Accountancy and Computerised Accounting.

​

Please review and verify the content before using it in your classrooms. If you find any errors or have feedback, please let me know.

​

Mujeeb Rahiman C

HSST Commerce

GHSS Pattikkad

Malappuram Dt.

​

✉️ mujeebchemmala@gmail.com

9995983075 �

There are certain expenses/losses which are related to the current accounting period but amount of which is not known with certainty because they are not yet incurred. It is necessary to make provision for such items for ascertaining true net profit.

Provisions

For example, a trader who sells on credit basis knows that some of the debtors of the current period would not pay or would pay only partially. It is necessary to take into account such an expected loss while calculating profit/loss according to the principle of Prudence or Conservatism.

Therefore, the trader creates a Provision for Doubtful Debts to take care of expected loss.

Examples of provisions are :

• Provision for bad and doubtful debts;

• Provision for depreciation;

• Provision for discount on debtors.

A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion.

Reserves are the appropriations of profit to strengthen the financial position of the business.

Reserves

Provision

Reserve

Charge against profit

Appropriation of Profit

It is created for a known liability

or expense

It is made for strengthening

the financial position

It reduces Taxes

Difference between Provision and Reserve

No effect on Tax

Creation of provision is

necessary

Creation of Reserve is not

necessary

A reserve is created by retention of profit of the business can be for either a general purpose or for a specific purpose.

1. General reserve

When the purpose for which reserve is created is not specified, it is called General Reserve.

2. Specific reserve

Specific reserve is the reserve, which is created for some specific purpose and can be utilised only for that purpose

Examples of specific reserves are given below :

(i) Dividend equalisation reserve

This reserve is created to stabilise dividend rate. In the year of high profit, amount is transferred to Dividend Equalisation reserve. In the year of low profit, this reserve amount is used to maintain the rate of dividend.

(ii) Workmen compensation fund

It is created to provide for claims of the workers due to accident.

Reserves are also classified as revenue and capital reserves according to the nature of the profit out of which they are created.

(a) Revenue reserves

Revenue reserves are created from revenue profits which arise out of the normal operating activities of the business. Examples of revenue reserves are:

• General reserve

• Workmen compensation fund

• Dividend equalisation reserve

(b) Capital reserves

Capital reserves are created out of capital profits which do not arise from the normal operating activities. Examples of capital profits

• Profit on sale of fixed assets.

• Premium on issue of shares or debenture.

• Profit on revaluation of fixed asset & liabilities.

Revenue Reserve

Capital Reserve

It is created out of revenue Profit

It is created out of Capital Profit

It is created to strengthen financial

position

It is created for compliance of

legal requirements

General reserve can be utilised

any purposes

Difference between Revenue Reserve and Capital Reserve

It can be utilised for Specific

purposes

Secret reserve is a reserve which does not appear in the balance sheet. It may also help to reduce the tax liability

​

Secret reserve can be created by way of :

• Undervaluation of stock

• Making excessive provision for doubtful debts

• Charging higher depreciation than required

Secret Reserve

MUJEEB RAHIMAN C

HSST COMMERCE

GHSS PATTIKKAD

MALAPPURAM DT