NIOS Class 10 Accountancy Chapter 13 Provisions and Reserves

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NIOS Class 10 Accountancy Chapter 13 Provisions and Reserves

Also, you can read the NIOS book online in these sections Solutions by Expert Teachers as per National Institute of Open Schooling (NIOS) Book guidelines. These solutions are part of NIOS All Subject Solutions. Here we have given NIOS Class 10 Accountancy Chapter 13 Provisions and Reserves, NIOS Secondary Course Accountancy Solutions for All Chapters, You can practice these here.

Provisions and Reserves

Chapter: 13

Intext Questions 13.1

Fill in the blanks with suitable words: 

(i) Provision means an estimated amount to meet an uncertain __________ or ________ in future. 

Ans: Loss/Expense.

(ii) A provision may be provided for a __________ claim. 

Ans: Disputed. 

(iii) A provision is created by debiting __________ account. 

Ans: Profit and Loss.

(iv) A provision is not available for distributions as dividend among _________. 

Ans: Owner/Shareholder.

(v) A provision is generally shown on _________ side of the balance sheet.

Ans: Liability.

Intext Questions 13.2

Fill in the blanks with suitable words: 

(i) An amount kept aside from current income to meet unexpected happening in future is called ___________. 

Ans: Reserve. 

(ii) It is not legally mandatory to create a ___________. 

Ans: General Reserve.

(iii) ________ reserve is created out of __________ profit. 

Ans: Capital , Capital.

(iv) Profit on sale of fixed assets is ___________ profit. 

Ans: Capital.

(v) ________ reserve is not shown in the financial statement. 

Ans: Secret.

(vi) Profit set aside and used in business is called a _____________. 

Ans: Reserve. 

(vii) Profit set aside and invested outside the business is called ___________. 

Ans: Reserve fund.

(viii) Sinking Fund Investments are for a ___________ period.

Ans: Definite.

Intext Questions 13.3

I. State whether the following statements are True or False: 

(i) Provisions are the charges against profits for all apprehended losses. 

Ans: True.

(ii) All reserves appear on the liability side of the balance sheet.

Ans: True.

(iii) Capital reserves are freely distributed as profits. 

Ans: False.

(iv) The purpose of reserve is generally to strength the financial position of a business enterprise. 

Ans: True.

(v) A provision is made for a definite amount and therefore, a definite sum is set aside every year the meet the know contingency. 

Ans: True.

II. 

Multiple Choice Questions

(i) Out of the following which is not a provision: 

(a) Provision for bad debts. 

(b) Provision for discount on debtors. 

(c) Dividend Equalization Reserve. 

(d) Provision for Depreciation. 

Ans: (c) Dividend Equalization Reserve.

(ii) Out of the following which is not a reserve: 

(a) Reserve for Expansion. 

(b) Dividend Equalization Reserve. 

(c) Secret Reserve. 

(d) Provision for bad debts. 

Ans: (d) Provision for bad debts.

(iii) Out of the following name the reserve which is created not for any specific purpose but for meeting future contingencies: 

(a) General Reserve. 

(b) Capital Reserve. 

(c) Specific Reserve. 

(d) Secret Reserve. 

Ans: (a) General Reserve.

(iv) Out of the following name the reserve which can be utilised for issue of bonus shares: 

(a) General Reserve. 

(b) Capital Reserve. 

(c) Secret Reserve. 

(d) Sinking Fund. 

Ans: (b) Capital Reserve.

(v) Out of the following identify the item which is created by debiting the profit and loss appropriations Account: 

(a) Provision for bad debts. 

(b) Provision for discount on debtors. 

(c) Provision for Income tax. 

(d) General Reserve.

Ans: (d) General Reserve.

Terminal Exercise

1. What is meant by Reserve Fund?

Ans: When a part of the profit is set aside and used in the business, it is a reserve. But when a part of profits and other surplus is set aside and invested outside the business then it is known as a reserve fund. In this case, the retained amount is invested in safe securities which are readily and easily realisable.

2. What is meant by a provision?

Ans: The events which are about to happen in the future are planned in the present with the help of available resources. In the same way these things are followed in a business also. When there are certain expected losses/ expenses, these are planned to be managed in advance from the current year’s profits/ surplus. The amount which is kept separately to meet such expected losses/ expenses is called a Provision.

3. Give the meaning of reserves.

Ans: Reserve is an appropriation of the profits and not a charge to it because it is not supposed to meet any known liability or diminution in the value of an asset.To meet, business sets aside a part of the profits and other surpluses which is called a reserve.

4. State the purposes for which provisions are created?

Ans: Here are some common purposes for which provisions are created:

(i) Financial Reporting: Provisions are often created to ensure that financial statements accurately reflect a company’s financial position. They are set aside to account for anticipated future expenses or losses, ensuring that financial statements present a true and fair view of the company’s financial health.

(ii) Contingent liabilities: An entity recognises a provision if it is probable that an outflow of cash or other economic resources will be required to settle the provision. If an outflow is not probable, the item is treated as a contingent liability.

(iii) Asset impairment: An asset should be impaired when its fair market value is less than its carrying value. This may occur due to physical damage to the asset, a change in consumer demand, or legal changes surrounding the asset.

(iv) Restructuring costs: Restructuring costs are incurred by the company for different reasons, like when the firm is looking at merger and acquisition with/of another company, when the company is looking to downsize the operations or sell a partial business, lay off employees, or move assets in another location.

(v) Income Taxes: “Income taxes in provisions” typically refers to the accounting treatment of income taxes in financial provisions. Provisions are liabilities or expenses recorded on a company’s balance sheet that are uncertain in timing or amount. When it comes to income taxes, provisions are made to account for potential future tax liabilities or adjustments.

5. Why does an organisation create reserves? Explain briefly.

Ans: An amount which is kept aside from current income to meet the unexpected happening in the future is called a reserve e.g. General Reserve, reserve for expansion, reserve for equalisation of dividend etc. General Reserve is undistributed or retained profits. No reserve can be created if there is no profit. Reserves strengthen the financial positions of the business. Capital reserves are created out of capital profits eg. Capital gains, premiums on issue of shares and debentures, profits prior to incorporation etc. These reserves are not available for distribution of dividend. Secret reserve is not shown in the balance sheet. Revenue reserves are appropriations of profits which can be distributed as dividends. Specific reserve is created for a specific purpose e.g. dividend equalisation reserve, investment reserve, investment fluctuation reserve etc. When a part of the profit is set aside and invested outside the business then it is known as a reserve fund.

6. State the purposes for which capital reserves can be utilised.

Ans: Here are some common purposes for which capital reserves can be utilised:

(i) Business Expansion: Capital reserves can be used to fund expansion initiatives such as opening new branches, acquiring other businesses, or investing in research and development to diversify product lines.

(ii) Investment Opportunities: Companies may utilise capital reserves to seize investment opportunities that arise, such as purchasing stocks, bonds, or other financial instruments that offer potential returns.

(iii) Debt Reduction: Reserve to debt ratio indicates how many dollars we have in reserves for every dollar of debt owed to a creditor. This ratio is an indicator of how much money we are setting aside for future needs and our flexibility to react to adverse or unexpected events.

(iv) Emergency Fund: Reserves can act as a buffer during unforeseen circumstances like economic downturns, natural disasters, or other emergencies. Having adequate reserves can help a company weather financial hardships without resorting to drastic measures like layoffs or asset liquidation.

(v) Capital Expenditures: Funds from reserves can be allocated towards capital expenditures, such as purchasing new equipment, upgrading technology infrastructure, or renovating facilities to enhance operational efficiency.

7. Distinguish between provision and reserve (any four points).

Ans:

S.No.	Provisions	Reserves
(i)	It is created by debiting the Profit & Loss A/c.	It is created by debiting the Profit & Loss Appropriation A/c.
(ii)	It is a charge against the profits without which true profit or loss of the business can’t be ascertained.	It is an appropriation of profits and doesn’t require it to be created to ascertain true profit or loss.
(iii)	It has to be provided even if  there is loss or no profit in the business. It is created irrespective of whether there is profit or loss in the business.	It can be created only when there is profit in the business.
(iv)	It can’t be distributed as a dividend among the shareholders.	It can be distributed as a dividend  among the shareholders.

8. Describe briefly the following: 

(i) Secret Reserves.

Ans: