NIOS Class 12 Accountancy Chapter 15 Provisions and Reserves

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NIOS Class 12 Accountancy Chapter 15 Provisions and Reserves

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Provisions and Reserves

Chapter: 15

Module – 3: Financial Statement

INTEXT QUESTIONS 15.1

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 Account.

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

Ans: Shareholders.

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

Ans: Liability.

INTEXT QUESTIONS 15.2

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 15.3

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 strengthen 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 to meet the known 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.

(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.

(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.

(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.

(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.

(d) General Reserve.

Ans: (d) General Reserve.

TERMINAL EXERCISE

1. What is meant by Reserve Fund?

Ans: Reserve Fund means a part of profits and other surplus which is set aside and invested outside the business in safe and easily realisable securities. It is created to strengthen the financial position of the business and the use of the term “fund” indicates that the amount is invested outside the business.

2. What is meant by a provision?

Ans: A provision is an estimated amount set aside out of profits to meet an uncertain loss or expense in the future. It is created for known liabilities whose exact amount cannot be determined accurately and is charged against profit.

3. Give the meaning of reserves.

Ans: Reserves are amounts set aside out of profits to meet future uncertainties or contingencies. They are an appropriation of profits and not a charge against profits, and are created to strengthen the financial position of the business.

4. State the purposes for which provisions are created?

Ans: (i) For depreciation, renewal, or reduction in the value of assets.

(ii) For known liabilities whose amount cannot be determined accurately.

(iii) For disputed claims.

(iv) For specific losses such as bad debts.

(v) For payment of taxes or other liabilities.

(vi) For contingent liabilities.

5. Why an organisation creates reserves? Explain briefly.

Ans: An organisation creates reserves to meet future uncertainties and unexpected losses that may arise in business. Since the future is uncertain, a part of the profits is set aside to strengthen the financial position of the business and ensure stability. Reserves also help in the expansion and development of the business and in equalizing dividends over different years. Thus, reserves act as a safety cushion and provide financial security to the organisation.

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

Ans: (i) For issue of bonus shares.

(ii) For writing off goodwill.

(iii) For writing off preliminary expenses.

(iv) For writing off share or debenture issue expenses.

(v) For writing off losses prior to incorporation.

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

Ans:

S. No.	Provisions	Reserves
1.	It is created by debiting the Profit & Loss A/c.	It is created by debiting the Profit & Loss Appropriation A/c.
2.	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 to be created to ascertain true profit or loss.
3.	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.
4.	It can’t be available to be distributed as dividend among the shareholders.	It can be distributed as dividend among the shareholders.
5.	It is a sum for known liability or for specific contingency e.g. provision for bad and doubtful debts, or provision for depreciation etc.	It is a sum to meet an unknown future liability or contingency or to strengthen the financial position of the business or for equalization of dividends etc.