RESERVE, RESERVE FUND, PROVISION Advance Accounts for std 11 ch 3

STD  11   ACCOUNT     CH-3  RESERVE, RESERVE FUND, PROVISION                         --------------------------------------------------------------------------------

Reserve, Reserve fund, Provision

-Q-1          What is reserve ?  Explain the type of  reserve?

Ans:  Taking into consideration the future expenses and loss, the part of  
        profit set a part is known as reserve  .

        * The purpose of creating reserve are as under ;

1.     To meet the future contingent loss and expenses, e.g. Bad debts,
        repairing .

2.     To meet the provision for the payment to be made in future for known
        liabilities, e.g. A reserve to make the payment for provident fund.

3.     To strengthen the financial position of the business.
4.     To strengthen liquid position of business.

5.     To provide for development.
        

         Following are the type of  reserve ;
1.     General reserve ;                                                              

        When there is no specific purpose to create the reserve but to   
        strengthen the finical position of the business a part of the profit is
        kept a side is known as  general reserve.

2.     Special reserve and provisions:  A reserve which is created in order
        to meet the future  certain expenses, or losses, is known as special
        reserve.

3.     Capital reserve :  When a profit by selling of the an assets is set  
        apart as called capital reserve.

4.     Sinking fund :  Sinking fund is a special type reserve. It is maintained to repay the long term debts on maturity such as Debentures, bank loan etc, as well as to make the arrangements  to purchase new assets in place of the depreciated fixed assets.

5.         Secret reserve : A reserve which is created but not shown in balance sheet is 
       known as secret reserve.

Q-2  Explain the meaning of general reserve fund, Narrates its objectives and
         advantages.  
Ans:  When there is no special purpose to create the reserve but to strengthen the finical position of the business a part of the profit is kept a side is known as general reserve. In other words it can be said that a reserve which can be used for general purpose and not for    specific purpose as known as general reserve. In order to create general reserve,         the amount will be debited to p/l, appropriation account and general a/c will be created. 

                                                                                                        

The following are the main objective and advantaged of general reserve.

  
1.     To strengthen the finical position of the business: the amount kept separate from the profit is not reinvested in the firm of assets. But it will be reinvested in the firm as on additional capital and the finical position of business     becomes stronger.

 2.    To meet future contingencies:   If the is depression or if natural calamity arises, the reserve will business to meet them. Hence the efficiency increases to absorb the contingent losses that arise in future.

3.     To strengthen the liquidity:   The liquidity position of the business becomes stronger because of the certain of the  G, R which can be  easily converted in cash. This reserve will help in providing sufficient working capital and in meeting current liabilities as and when they arise.

4.     To equalize the rate of dividend:    As G.R is created from the year of profit, the year in which the profit is low or if the loss incurred, G. R. can be used to maintain the rate of dividend. And there buy the goodwill of the firm is protected.

5.     To give bonus shares:       
        G. R.. can be used to give bonus share to existing share holders.

6.     To provide for development:    For expansion or development of the firm there is no need to borrow from out side the firm which reduce their expenses like interest to be paid.  

Q-3  Explain the special reserve with help of illustration?

Ans: A reserve set aside out of profit to meet the future possible expenses and losses          like B. D. or to meet some known liabilities, is as known as a special reserve.; This provision is made even though, there is no profit in firm. It is to be debited to p/L  A/c.

        * The objects are as follows :

1.     To meet with specific expenses of loss which are going to take in future. e.g. A provision for depreciation.

2.     To met with uncertain or unestimated expenses or probable losses which are going to take place in future, e.g. A reserve created for pending claims, A provision for taxation.      

3.     The according effects of  O/s expense are to be recorded in accounts, Adjustments are written for this. Thus the accounts (by making provision) are known as current liabilities but not provision.  And the arrangements for the uncertain amount like B. D. R., Repairing reserve, other expense which are not certain but probable is a provision.

Q-4  Distinguish between General reserve and provision {imp}

Ans	General reserve	Provision
1 2 3 4 5 6 7	General reserve is not created for any specific purpose but is created to strengthen the finical position of business. It is debited to p/L appro. a/c. The amount is General reserve can be used to give bonus, share, to declare dividend or to write off the losses. It can be created only in the year in which profit is earned because it is appropriation of profit. How much amount is to be transferred to reserve depends upon the provision of law, amount of profit, will and wishes of the administrator  It will be shown under the heading of reserve and surplus to the balance sheet on capital liabilities. It is a part of profit it can be use to write off losses occurs in any year	It is created for specific purpose like depreciation, renovation, bad debts, taxation etc.  It is debited to p/L account. Provision can be used for the purpose for which it is created. E.g. provision for taxation can be used to the payment for taxes only.  Necessary provision also be made even in the year in which losses are incurred. The amount to be transferred to provision is certain.            Amount of provision will be deducted from the respective asset in B/s or it will be  shown under the gearing of provision on the capital liabilities sides. It is use for the sum purpose for which it is created.

Q-5  Write a short note on capital reserve ?    

Ans: A profit which is not earned from revenue income like sales of goods or services,
        but the profit earned from the sale of assets is known as capital reserve. Generally
        such profit will be kept in the respective A/c or will be transfer to capital reserve.
        Generally such amount of capital profit can be used to distribute the dividend.

   * Capital reserve is created from the following profit  having capital nature.

1.     A profit released from the sales of fixed assets.

2.     A profit release by revaluation of any of the fixed assets.

3.     A profit prior to incorporation of a company.

4.     A profit earned by paying less, at the time of purchase of business. Means, when
        the purchase price is paid less than the net assets of the business.

5.     A balance of the share forfeiture A/c, after the re issue of forfeited share.

6.     A premium received at the time of issue of shares of debenture.

7.     A profit earned at the time of redemption of debenture, when less amount paid on          
        debentures than the cost price of debentures.

        *  Capital reserve can be used for the following purpose.

1.     To write of capital losses.

2.     To write of the fictitious assets like goodwill, preliminary expenses, discount on
        debenture etc.

3.     To issue the bonus shares, if the articles of Association provides.  

         The amount of capital reserve is shown under the heading “Reserve and surplus”     separately from General reserve.     

Q-6   Write a short notes on sinking fund ?

Ans : Sinking fund is special type of reserve. It is maintain to repay on maturity the long term debts such as bank loan, debentures etc. as well as to make arrangements to purchase new assets In place of the depreciated fixed assets. In fact such sinking fund is a profit kept separately, which is not use for any other purpose by company or unit. After completion of the object for which it is created it is generally transferred to general reserve. But if the sinking fund is created in order to replace any  fixed assets the amount is debited to profit and loss account. The amount transferred to both the above stated sinking funds generally is invested in government securities or in any other investments out side the business. The amount of interest received on such investment, will also be invested in the same by crediting the sinking fund. When the amount of loan for debentures is to be paid on maturity, the liability will be satisfied with the help if   the amount realised from the sale of securities. In order to avoid the loss arising from the sale of securities, instead of investment , the amount is used for the payment to take insurance policy. In case the liability will be satisfied with the help of the amount received of policy. which is received on the date of maturity.

Q-7   What is secret  Reserve ?  Explain the risk of creation on secret reserve.

Ans : Such reserve account dose not exits in the books of accounts. But the assets and receivable as well as liabilities and provision disclosed in the books of account are taken such a value that secret reserve emerges in the business e.g. reserve created by making more than necessary the provisions for depreciation, bad debts reserve, contingent liabilities or by presenting the assets at liabilities lesser value      then the actual value and liabilities at higher value then the actual value.

        *   following are the risk arising because of the creation of secret reserve.

1.     The balance sheet does not represent the true picture of business.

2.     There remain a possibility of that shareholder may not received dividends paid is less, the market price of share of the company will fall down which will affects the goodwill of the company.

3.     There remains possibility that administrators may obtain profit by decreasing the price of share of a company, though malpractising with help of secret  reserve.

4.     In case of fire accident, less compensation will be received from insurance co.  etc. 

 

Q-8   Explain with reasons, whether following items are reserve or provision ?

Ans : 1. Taxation reserve: This reserve is provision because this reserve will be used        only for that purpose which for it is created.

2.      Depreciation fund : It is provision. The depreciation fund is created to meet with specific expenses or losses which are going to take place in future. E.g.      a provision for depreciation, repaid and renovation of the assets.           

3.      Dividend equalization fund : Dividend equalization fund  is reserve. It is created to equalize the rate of the dividend but it is also used for any other purpose. So, dividend equalization fund  is a reserve.     .

4.  Bad debts reserve : B. D. R. is provision, because the objective to create this reserve is to write the losses which will be probable to arise in the future. 
5.      Investment fluctuation fund :This is a provision. It can be created to write in future  with increasing & decreasing in the market price of the investment of the business.

6.      Sinking fund : It is a provision. It is created to pay the long term debts on maturity, to purchase new assets when old are totally depreciated. But when the object is full fill the amount of sinking fund is generally transferred to general reserve.

7.      Workmen’s compensation fund :  It is provision. It is used only for the specific purpose of giving compensation to the workers.

8.      Employee’s bonus fund :  it is a provision. It is used only to give bonus to employees.

Q-9   Explain what is reserve fund?  Explain how it differs from general reserve?

Ans :         If the amount of  reserve is not invested in the investments outside the business. It known as G.R. but if this amount is invested in investment outside the business then it is known as reserve fund. Thus the amount of reserve is invested outside the business, the word fund is added with reserve and it is known as reserve fund.