GSEB Solutions Class 11 Accounts Part 2 Chapter 3 Provisions and Reserves

Gujarat Board GSEB Textbook Solutions Class 11 Commerce Accounts Part 2 Chapter 3 Provisions and Reserves Textbook Exercise Questions and Answers.

Gujarat Board Textbook Solutions Class 11 Accounts Part 2 Chapter 3 Provisions and Reserves

GSEB Class 11 Accounts Provisions and Reserves Text Book Questions and Answers

Question 1.
Write the correct option from those given below each question:
1. General reserve is created by debiting …………………… .
(a) Profit and Loss A/c
(b) Profit and Loss appropriation A/c
(c) Trading A/c
(d) Capital A/c
Answer:
(b) Profit and Loss appropriation A/c

2. Provision is created out of …………………… .
(a) Profit and Loss A/c
(b) Profit and Loss appropriation A/c
(c) Trading A/c
(d) Capital A/c
Answer:
(a) Profit and Loss A/c

3. ………………………. account shows that reserves are invested outside the business.
(a) General reserve
(b) Provision
(c) Reserve fund
(d) Capital reserve
Answer:
(c) Reserve fund

4. ………………………. balance is generally not used for distribution of dividend.
(a) General reserve
(b) Provision
(c) Reserve fund
(d) Capital reserve
Answer:
(d) Capital reserve

5. ………………………….. is not advisable to create for business.
(a) General reserve
(b) Provision
(c) Secret reserve
(d) Capital reserve
Answer:
(c) Secret reserve

Question 2.
Answer the following questions in one sentence:

1. State types of reserves.
Answer:
There are two types of reserves :
(1) Revenue reserve and
(2) Capital reserve.

2. What is reserve fund?
Answer:
When the amount of reserve is invested in securities outside the business, it is known as Reserve fund.

3. What is secret reserve?
Answer:
The reserve created without showing in profit and loss account for the purpose of strengthening financial position of the business is known as Secret reserve.

4. Which reserve is used to write off loss on sale of fixed assets?
Answer:
Capital reserve is used to write off loss on sale of fixed assets.

5. Give four illustrations of capital reserve.
Answer:
Four illustrations of capital reserve are as under:

1. Profit on sale of fixed assets and investments.
2. Profit on revaluation of fixed assets.
3. Premium received by the company on issue of shares or debentures.
4. Profit prior to incorporation of the company.

6. Give four illustrations of provision.
Answer:
Four illustrations of provision are as under :

1. Provision for depreciation,
2. Provision for bad debt,
3. Provision for taxtion and
4. Provision for repairs and renewals.

Question 3.
Balances mentioned below are appropriated from profit. State whether it is reserve or provision:

1. Bad debts reserve
2. Debenture redemption fund
3. Depreciation fund
4. Workers accident compensation fund
5. Discount reserve on debtors
6. Dividend equalization fund
7. Capital reserve
8. Workers profit-sharing fund
9. General reserve
10. Capital redemption reserve
Answer:
Reserves :
(2) Debenture redemption fund
(4) Workers accident compensation fund
(6) Dividend equalization fund
(7) Capital reserve
(9) General reserve
(10) Capital redemption reserve

Provisions :
(1) Bad debts reserve
(3) Depreciation fund
(5) Discount reserve on debtors
(8) Workers profit-sharing fund

Question 4.
Answer the following questions in two or three sentences:

1. What is provision?
Answer:
Provision means an amount appropriated from profit to honour probable liabilities which can be identified but the amount of which cannot be ascertained accurately, e.g., Provision for depreciation, provision for bad debt, provision for repairs and renewals, provision for taxation, provident fund, pension fund, workers profit-sharing fund, provision for voluntary retirement scheme, etc.

2. State the characteristics of provision.
Answer:
Characteristics of provision are as under :

• Provision is an amount appropriated from profit or income for specific purpose.
• Provision is an amount appropriated from – profit for probable expenses or losses or liabilities for which the amount cannot be determined accurately.
• Provision is appropriated out of profit and loss account.

3. What is the importance of provision?
Answer:
Importance of provision is as under:

• True and fair profit or loss of the business can be ascertained.
• On the expiry of the useful life of an asset, the managed funds (Provision) can be used to purchase new assets.
• Known liability of future can be spread evenly over certain years by making provisions.
• Assumption of going concern and principle of prudence can be followed by making provision.
• Business capital will be maintained by making provisions.
• To show the assets and liabilities of the business at correct and true value.
• To provide for future losses and expenses if amount of such losses and expenses is not determined in advance.
• Provision is made to prevent impact of transactions made during the year on the financial performance in future.

4. Give the meaning of reserve.
Answer:
Considering the future, the amount set apart from the profit is known as a reserve. According to accepted business principles, reserve is the portion of profit set aside for meeting known or unknown future contingencies.

In short, the amount which is allocated from the profit for any specific purpose or without any purpose is known as reserve. This reserve is created from the Profit and Loss Appropriation Account, e.g., General reserve, Workers accident compensation fund, Investment fluctuation reserve, Dividend equalization fund, Capital redemption reserve, Debenture redemption fund, etc.

5. What is the importance of reserve in business?
Answer:
The importance of creating reserve is as under:

• It strengthens the liquidity position for the solvency of the business.
• In order to meet any loss that may arise in future or to meet the future contingent loss, a reserve is maintained.
• Required necessary funds for expansion of the business is available from the reserve or profit of the business only.
• Reserve can be used to honor long term liabilities.
• Company can maintain dividend equalization by using reserve.
• Cash liquidity is to be maintained in the business by using reserve.
• A reserve is to provide for any known liabilities to be paid easily in future like provident fund, etc.
• Reserves are created to fulfil some of the statutory requirements.

Question 5.
Answer the following questions :

1. Clarify the importance of provision.
Answer:

• True and fair profit or loss of the business can be ascertained.
• On the expiry of the useful life of an asset, the managed funds (Provision) can be used to purchase new assets.
• Known liability of future can be spread evenly over certain years by making provisions.
• Assumption of going concern and principle of prudence can be followed by making provision.
• Business capital will be maintained by making provisions.
• To show the assets and liabilities of the business at correct and true value.
• To provide for future losses and expenses if amount of such losses and expenses is not determined in advance.
• Provision is made to prevent impact of transactions made during the year on the financial performance in future.

Considering the future, the amount set apart from the profit is known as a reserve. According to accepted business principles, reserve is the portion of profit set aside for meeting known or unknown future contingencies.

In short, the amount which is allocated from the profit for any specific purpose or without any purpose is known as reserve. This reserve is created from the Profit and Loss Appropriation Account, e.g., General reserve, Workers accident compensation fund, Investment fluctuation reserve, Dividend equalization fund, Capital redemption reserve, Debenture redemption fund, etc.

2. Why a reserve is created in business?
Answer:

Considering the future, the amount set apart from the profit is known as a reserve. According to accepted business principles, reserve is the portion of profit set aside for meeting known or unknown future contingencies.

In short, the amount which is allocated from the profit for any specific purpose or without any purpose is known as reserve. This reserve is created from the Profit and Loss Appropriation Account, e.g., General reserve, Workers accident compensation fund, Investment fluctuation reserve, Dividend equalization fund, Capital redemption reserve, Debenture redemption fund, etc.

• It strengthens the liquidity position for the solvency of the business.
• In order to meet any loss that may arise in future or to meet the future contingent loss, a reserve is maintained.
• Required necessary funds for expansion of the business is available from the reserve or profit of the business only.
• Reserve can be used to honor long term liabilities.
• Company can maintain dividend equalization by using reserve.
• Cash liquidity is to be maintained in the business by using reserve.
• A reserve is to provide for any known liabilities to be paid easily in future like provident fund, etc.
• Reserves are created to fulfil some of the statutory requirements.

3. What is specific reserve? State its types.
Answer:
Meaning: When a revenue reserve is created out of profit and loss appropriation account for specified purpose is known as Specific reserve or Special reserve. Such reserve is used for the same purpose for which it is created. When the purpose of such a reserve is over, the balance of Specific reserve is to be transferred to the General reserve and used for any other purpose.

Types of specific reserve :

• Investment fluctuation fund,
• Debenture redemption fund,
• Sinking fund,
• Dividend equalization fund and
• Workers accident compensation reserve (fund).

4. How the secret reserve is created?
Answer:
Secret reserve can be created as follows :

• By undervaluing closing stock.
• By showing more contingencies than required, e.g., provision for bad debt.
• By showing contingent liability as actual liability.
• By making more provision for depreciation.
• By recording capital expenditure in Profit and Loss Account.
• By showing more expenses than actual.

5. What is capital reserve? State its uses.
Answer:
Meaning: The reserve which is created out of capital profit and cannot be used for distribution of dividend is known as Capital reserve.
Sources of capital reserve: Following are the sources of capital reserve :

• From profit on sale of fixed assets and investments.
• From profit on revaluation of fixed assets.
• From profit made at the purchase of an existing business at lower cost than the actual one.
• From profit prior to incorporation of the company.
• From premium received by the company on issue of shares or debentures.
• From balance of Share Forfeiture Account, after reissue of forfeited shares by the company.
• From the profit earned at the time of redemption of debentures.
• From capital redemption reserve for redeeming preference shares.

Use of capital reserve:
A company cannot declare dividend from the capital reserve, but it can be put to following uses :

• To write off capital losses.
• To issue bonus shares; if Articles of Association provides.
• To write off fictitious assets like goodwill, preliminary expenses, discount on debentures.
• In special circumstances under special conditions dividends can be declared out of capital reserve also.

Question 6.
Distinguish between :
1. General Reserve and Provision
Answer:

Points	General Reserve	Provision
1. Meaning	General reserve is a reserve created for general purposes.	Provision is the sum set aside for specific purposes.
2. Objective	A general reserve is created to improve the financial position of the business.	Provision is created for specific purposes like depreciation, bad debts, renovation, taxation, etc.
3. Profit or Loss	It can be created only in the year in which profit is earned.	Provision is to be made even if losses are incurred.
4. From which account?	General reserve is created by debiting Profit and Loss Appropriation account.	Provision is created by debiting Profit and Loss Account.
5. Appropriation of amount	Amount to be transferred to reserve depends upon the provision of law, amount of profits and wills and wishes of the directors.	The amount to be transferred to provision is certain.
6. Use	The amount of general reserve is used to give bonus shares, to declare dividends or to write off losses.	Provision is used for the purpose for which it is created.
7. Investment	Amount of general reserve can be invested in the business or outside the business.	Amount of provision cannot be invested in the business or outside the business.
8. In the Balance Sheet	General reserve is shown under the heading ‘Reserves and Surplus’ in the Balance Sheet on Capital – Liabilities side.	Amount of provision is deducted from the concerned asset in the Balance Sheet or will be shown under the heading ‘Provisions’ on the Capital-Liabilities side.
9. Voluntary or Mandatory	Creation of general reserve is voluntary.	Creation of provision is mandatory or compulsory.
10. Dividend	General reserve can be used for distribution of dividend.	Provision cannot be used for the distribution of dividend.

2. General Reserve and Capital Reserve
Answer:

Points	General Reserve	Capital Reserve
1. Meaning	The amount set aside from the profit for general purposes is known as general reserve.	Capital reserve is created out of the capital profit which cannot be used to declare dividend.
2. From which profit?	Every year, general reserve is created out of revenue profits.	Capital reserve is created out of capital profit whenever realised.
3. In the Balance Sheet	General reserve is shown under the heading ‘Reserve and Surplus’.	Capital reserve is shown separately from general reserve under the heading ‘Reserves and Surplus.’
4. Use	General reserve can be used for any purpose. It can also be used to declare dividend.	Capital reserve can be used to write off capital losses, to give discount on shares and debentures, to write off fictitious assets and to issue bonus shares. It cannot be used to declare dividend.
5. From which account it is appropriated?	General reserve is appropriated out of Profit and Loss Appropriation Account.	Capital reserve arises out of capital profit. The amount of capital profit is transferred to Capital Reserve Account.
6. Limitation of use	Purpose of general reserve is not specific. It means use of General reserve is unlimited.	Purpose of capital reserve is specific. It means use of capital reserve is limited.