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P2 C3 Provisions and Reserves — Account STD 11 Commerce — Question

Gujarat BoardEnglish MediumSTD 11 CommerceAccountP2 C3 Provisions and Reserves3 Marks
Question
Distinguish between : $(1)$ General Reserve and Provision :
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Answer

Difference between General Reserve and Provision :
Points General Reserve Provision
$1.$ Meaning The certain amount is kept aside from the profit of the unit for strengthening the economic position of the unit & for future growth of the business, such amount is called the General Reserve. The amount, which is provided for the expected known liabilities or losses, is called Sepcial Reserve or Provision.
$2.$ Purpose The purpose of creating general reserve is to increase financial soundness of the business or to meet with contingent expenses. Provision is made for special purpose of meeting with known probable liability or losses.
$3.$ Accounting Effect General reserve is created out of profit and loss appropiration account. Provision is created out of profit and loss account.
$4.$ Existence of Profit An amount is appropriated to general reserve only if there is profit at the end of an accounting year and it is voluntary. Provision is made even if there is loss at the end of an accounting year.
$5.$ Distribution of amount The amount, which deemed fixed by the management can be transferred to reserve and there is on fix rules for this. The amount of this type of reserve is pre-determined or it can be calculated as perfect amount or percentage on the base of past experience records.
$6.$ Uses General reserve can be used for any purpose Provision can be used only for the purpose for which it is created.
$7.$ Investment General reserve can be invested in the business or outside the business. Provision can not be invested in the business or outside the business.
$8.$ Distribution of dividend General reserve can be used for distribution of dividend. Provision can not be used for the distribution of dividend.
$9.$ Necessity There is no necessity of general reserve to determined the net profit of a unit. General reserve can be determined on the base of net profit. There is necessity of provision to determined of net profit of a unit.
$10.$ The effect in balance sheet General reserve is shown in Balance sheet on liabilities side under the heading of 'Reserve and Surplus'. Provision is shown in balance sheet on liabilities side. Provision against and asset is shown by deducting from respective asset on assets side.

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