Provisions and reserves are crucial topics in Class 11 Accountancy, forming a significant part of the examination. Understanding these concepts thoroughly will not only help students score well but also build a strong foundation for higher studies in finance and accounting.
Below are some of the most important questions along with their detailed answers to help students prepare effectively.
Topics Discussed
1. What are Provisions and Reserves? Explain with Examples.
Answer:
Provisions and reserves are both financial adjustments made by businesses to ensure financial stability, but they serve different purposes.
- Provisions: These are created to meet known expenses or liabilities whose exact amount or timing is uncertain. They are charged to the Profit & Loss Account and are considered an expense.
- Example: Provision for Doubtful Debts, Provision for Depreciation.
- Reserves: These represent profits set aside to strengthen the financial position of the business. They are an appropriation of profit and not an expense.
- Example: General Reserve, Capital Reserve.
2. Differentiate between Provisions and Reserves.
Answer:
| Basis | Provisions | Reserves |
|---|---|---|
| Purpose | Created for a specific liability/expense | Created for financial strengthening |
| Nature | Compulsory deduction from profit | Voluntary allocation of profit |
| Usage | Used for the purpose it is created | Can be used for expansion, dividends, etc. |
| Effect on Profit | Reduces net profit | Does not affect net profit directly |
| Example | Provision for Doubtful Debts | General Reserve |
3. Why are Provisions Created?
Answer:
Provisions are created for the following reasons:
- To meet known future liabilities whose exact amount and timing are uncertain.
- To follow the prudence concept of accounting, ensuring that expected losses are accounted for in advance.
- To provide a true and fair view of the financial position of the company.
- To avoid sudden financial burdens on the business in the future.
4. What are the Types of Reserves? Explain.
Answer:
Reserves are mainly classified into:
- Revenue Reserves – Created from revenue profits and used for business expansion or distributing dividends.
- Example: General Reserve, Dividend Equalization Reserve.
- Capital Reserves – Created from capital profits, not used for dividend distribution but for financial restructuring.
- Example: Profit on Sale of Fixed Assets, Share Premium Reserve.
- Secret Reserves – Not disclosed in financial statements to strengthen the financial position.
- Example: Undervaluation of Stock or Overstatement of Liabilities.
5. What is the Journal Entry for Creating a Provision?
Answer:
When a provision is created, the following journal entry is recorded:
Profit & Loss A/c Dr.
To Provision for Doubtful Debts A/c
(Being provision created for doubtful debts)
6. What is the Journal Entry for Using a Provision?
Answer:
If the provision is used, the entry is:
Provision for Doubtful Debts A/c Dr.
To Bad Debts A/c
(Being bad debts written off using provision)
7. What is the Difference Between Specific Reserve and General Reserve?
Answer:
| Basis | Specific Reserve | General Reserve |
|---|---|---|
| Purpose | Created for a specific purpose | Created for general financial stability |
| Flexibility | Cannot be used for other purposes | Can be used for multiple purposes |
| Example | Dividend Equalization Reserve | General Reserve |
8. What is the Accounting Treatment for Reserves?
Answer:
Reserves are created by appropriating profits and are shown under the liabilities side of the balance sheet under the head Reserves & Surplus. When utilized, they are debited to the respective reserve account.
9. How Does the Creation of Provision Affect the Financial Statements?
Answer:
- It reduces the net profit in the Profit & Loss Account.
- It is shown under liabilities in the Balance Sheet.
- It ensures compliance with accounting standards and helps in fair financial reporting.
10. What are the Effects of Reserves on Business Growth?
Answer:
Reserves play a crucial role in business growth:
- Ensures Financial Stability – Provides funds for expansion and crisis situations.
- Helps in Dividend Distribution – Companies can maintain a stable dividend payout.
- Supports Expansion Plans – Can be used for business development and acquisitions.
- Enhances Creditworthiness – Strong reserves improve a company’s credibility in the market.
Final Thoughts
Provisions and reserves are essential for maintaining a company’s financial health. Understanding these concepts thoroughly will help students excel in their board exams and gain practical knowledge for future endeavors in finance and accounting.
By practicing these questions and understanding their answers, students can confidently tackle the Class 11 Accountancy exam. Keep revising and practicing numerical problems to strengthen your grasp of the topic!