Account 4 Marks Question

Difference between Reserve and provision:

	Basis	Reserve	Provision
1.	Nature	It is an appropriation of profit.	It is a charge against Profit.
2.	Purpose	It is created to strengthen the financial position and to meet unforeseen liability or losses.	It is made to meet known liability or contingency, when amount is not determind.
3.	Effect on profit	It is debited to the profit and Loss Appropriation Account. Hence, Profit is not affected.	It is debited to the profit and Loss Account. Hence, profit is reduced.
4.	Investment	It may be invested outside the business.	It is not invested.
5.	Distribution	Unutilised part can be distributed as dividend. It reduces divisible profit.	It cannot be used for distribution as profit/ dividend. It reduces net profits.
6.	Compulsion/ Prudence	It is created out of profits as a matter of prudence and due to legal requirements.	It is made because of accounting principles (prudence).
7.	Presentation	A reserve is shown on the liabilities side of Balance Sheet under the head 'Reserves and Surplus'.	It is shown either as a liability under the head 'Current Liabilities' or as deduction from the asset.

Examples of provisions:
Provisions are created for the fulfilment of various objectives:

1. Provision for Depreciation of Assets.
2. Provision for Taxation.
3. Provision for Bad and Doubtful Debts.
4. Provision for Discount on Debtors.
5. Provision for Repairs and Renewals of assets.

Examples of Capital Reserve:

1. Profit prior to incorporation.
2. Premium on issue of shares or debentures.
3. Profit on redemption of debentures.
4. Profit on forfeiture of shares, (u) Profit on sale of fixed assets.
5. Capital Redemption Reserve.
6. Profit on revaluation of fixed assets and liabilities.

1. General Reserve: is the amount set aside out of profits not for any specific purpose. It is available for any future contingency or expansion of business. Such reserve strengthens the financial position of the business. Example is General Reserve.
2. Specific Reserve: is that reserve which is set aside out of profits for a specific purpose and can be utilised only for that purpose. For example, Workmen Compensation Reserve is a specific reserve because it is maintained to to workmen. Debentures Redemption Reserve, Capital Redemption Reserve, Investment Fluctuation Reserve, etc., are other examples of Specific Reserve.

Difference between Reserve and provision:

	Basis	Reserve	Provision
1.	Nature	It is an appropriation of profit.	It is a charge against Profit.
2.	Purpose	It is created to strengthen the financial position and to meet unforeseen liability or losses.	It is made to meet known liability or contingency, when amount is not determind.
3.	Effect on profit	It is debited to the profit and Loss Appropriation Account. Hence, Profit is not affected.	It is debited to the profit and Loss Account. Hence, profit is reduced.
4.	Investment	It may be invested outside the business.	It is not invested.
5.	Distribution	Unutilised part can be distributed as dividend. It reduces divisible profit.	It cannot be used for distribution as profit/ dividend. It reduces net profits.
6.	Compulsion/ Prudence	It is created out of profits as a matter of prudence and due to legal requirements.	It is made because of accounting principles (prudence).
7.	Presentation	A reserve is shown on the liabilities side of Balance Sheet under the head 'Reserves and Surplus'.	It is shown either as a liability under the head 'Current Liabilities' or as deduction from the asset.

“A Provision is the amount written off or retained by way of providing depreciation, renewals or diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy."

Examples:

1. General Reserve.
2. Capital Reserve.
3. Dividend Equalisation Reserve.
4. Investment Fluctuation Fund.
5. Workmen Compensation Fund.
6. Reserve for Redemption of Debentures.

Difference between Revenue Reserve and Capital Reserve:

	Basis	Revenue Reserve	Capital Reserve
1.	Source	It is created out of business or revenue profits.	It is created out of capital profits.
2.	Usage	It can be used for distribution of dividends without any precondition.	It can be used for distribution of dividends only if the company satisfies creatain conditions prescribed by the Companies Axt.
3.	Purpose	It is created for strengthening the financial position and meeting the unforseen contingencies or some specific prupose.	It is created for meeting capital losser or to be used for purposes specified by the Companies Act.

Reserves are the amounts set aside out of profits. It is an appropriation of profits or accumulated profits to strengthen the financial position of the business. Reserves are not set aside to meet a liability or depreciation in the value of assets but is set aside to meet known or unknown contingency that may arise in future.
Examples are General Reserve, Reserve for Expansion, Reserve for Equalisation of Dividends, Reserve for Increased Costs of Replacement, etc.

Capital Reserves are set aside out of capital profits and are normally not available for distribution as dividend. In other words, reserve created out of capital profits and which is not readily available for distribution as dividend among the shareholders is called Capital Reserve.
Examples of capital reserves are:

1. Profit prior to incorporation.
2. Premium on issue of shares or debentures.

Difference between Provision and Reserve:

	Basis of Difference	Provision	Reserve
1.	Meaning	It is created to meet a known liability	It is created to meet an unknown liability.
2.	Necessity (Charge or Appropriation)	Creation of provision is a legal necessity. Provisions have to be provided for even if there are no profits. Thus, provision is charge against profit	Creation of reserves discretionary. It adequate. Thus, reserve is an Appropriation of Profit.
3.	Object	The object is to provide for depreciation, doubtful debts and other specific liabilities.	The object of reserves is to strengthen the finacial position of the business.