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Distinction between Provision and Reserve

 

Basic of Distinction

Provision

Reserve

(a)  Meaning

Provision means-

(i)Any amount written off.

(ii)      Any amount retained by way of pro­viding for depreciation, renewal or diminution in value of assets

(iii)    Any pro­vision for known liability, of which amount cannot be dete­rmined with subs­tantial Accuracy.

Profit retai­ned in the business not having any of the attri­butes of a ‘provision’ is to be treated as a reserve. Also pro­visions in excess of the amount con­sidered nece­ssary for the pur­poses these were orig­inally made area to be considered as reserves.

(b)        Purpose

It is created for a parti­cular purpose and can only be used for those parti­cular pur­poses.

It need not necessarily be created for a parti­cular pur­pose. 

(c)Charge Vs. Appro­priation

It is a charge against the profit

It is an appro­priation out of profit

(d)        Dis­closure in Balance sheet

Usually a pro­vision is shown by way of de­duction from the amount of the items for which it is created. E.g. Provision for doubtful debts.

Reserve is shown as a separate item under the head Reser­ves and surplus on the lia­bilities side of the bal­ance sheet.

(e)        Inves­tment outside the Business

There is no question of inves­tment of the amount of provisions.

The amount of a reserve can be in­vested out­side the busi­ness. If it is invested out­side the busi­ness, it is called ‘FUND’.

 

 

(f) Utilization for dividends

It cannot be utilized for distribution by way of dividends.

 

It can be utilized for dis­tribution by way of divi­dends.

(g)        Exam­ples

Provision for Tax Provision For Doubtful debts.

General Reserve Con­tingency Reserve Workers’ Welfare Reserve   

 

Example:

Suresh started business on April 1, 2001 with a capital of Rs. 30,000. The following Trial Balance was drawn up from his books at the end of the year:
 
Particulars Amount Particulars Amount
  Rs.   Rs.
Drawings 4,500 Capital 40,000
Plant & Fixtures 8,000 Sales 1,60,000
Purchases 1,16,000 Creditors 12,000
Carriage Inward 2,000 Bills Payable 9,000
Wages 8,000    
Return Inward 4,000    
Salaries 10,000    
Printing 800    
Advertisement 1,200    
Trade Charges 600    
Rent 1,400    
Debrors 25,000    
Bills Receivavle 5,000    
Investment 15,000    
Discount 500    
Cash at Bank 16,000    
Cash in Hand 3,000    
  2,21,000   2,21,000

The value of stock as at 31 March, 2002 was Rs. 26,000. You are required to prepare his Trading & Profit & Loss Account for the year ended 31st March 2002 and a Balance Sheet as on that date after taking the followings facts into account:

(i)       Interest on capital is to be provided at 6% p.a.

(ii)     An additional capital of Rs. 10,000 was introduction by Suresh on October 1, 2001.

(iii)   Plant & Fixture are to be depreciated by 10% p.a.

(iv)   Salaries outstanding on March31, 2002 amounted to Rs.500.

(v)     Accrued interest on investment amounted to Rs.750.

(vi)   Rs.500 are Bad Debts and a Provision for Doubtful Debts is to be created at 5% on the balance of debtors.
 

 

Solution:
TRADING AND PROFIT & LOSS ACCOUNT
For the year ending 31st March, 2002
 
  Rs.   Rs.
To Purchases
To wages
1,16,000
8,000
By Sales                              1,60,000
Less: Return Inward               4,000
 
1,56,000
To Carriage Inward 2,000 By Closing Stock 26,000
To Gross Profit c/d 56,000    
  1,82,000   1,82,000
To Salaries                            10,000   By Gross Profit b/d 56,000
Add: Outstanding Salaries         500
To Printing
10,500
800
By Accrued Interest on
Investment
 
750
To Advertisement 1,200    
To Trade Charges 600    
To Rent 1,400    
To Discount 500    
To Interest on Capital(1)      
(Rs.1,800+Rs.300) 2,100    
To Depreciation on Plant &      
Fixtures 800    
To Bad Debts                             500      
Add: New Provision                1,225 1,725    
To Net Profit Transferred to      
Capital A/c
 
37,125
56,750
   
56,750
       

BALANCE SHEET
As on 31st March, 2002
 
Liabilities Amount Assets Amount
  Rs.   Rs.
Bills payable 9,000 Cash in hand 3,000
Creditors 12,000 Cash at bank 16,000
Salary Outstanding 500 Bills Receivable 5,000
Capital                                  40,000   Debtors                                25,000  
Add: Interest on capital          2,100   Less: Bad Debtors                    500  
Add: Net Profit                     37,125   24,500  
79,225
Less : Drawings      4,500
 
74,725
Less: Prevision for
Doubtful Dates
(5% on Rs.24,500)             1,225
 
 
23,275
    Closing Stock 26,000
    Investments                           15,000  
    Add: Accrued Interest               750
Plant & Fixture                      8,000
15,750
    Less :Depreciation                    8,00 7,200
  96,225   96,225

 

Example:

Prepare Trading, P& L A/c and Balance Sheet from the following particulars as on 31st December, 1993:-
 
  Dr. Rs. Cr. Rs.
Cash in hand 2,000  
Cash at Bank 18,000  
Purchases and Sales 2,20,000 3,50,000
Return Inwards 6,000  
Return Outwards   7,500
Carriage on purchases 4,400  
Carriage on Sales 2,100  
Fuel and Power 15,500  
Stock (1-1-1993) 36,000  
Bad-Debts 6,200  
Bad-Debtors Provision   2,500
Debtors and Creditors 82,000 30,000
Capital   2,17,000
Investments 20,000  
Interest on Investments   2,000
Loan from X @ 18%p.a   10,000
Repairs 1,520  
General Expenses 10,600  
Land & Buildings 1,80,000  
Wages and Salaries 18,000  
Miscellaneous Receipts   120
Bills payable   5,200
Stationery 2,000  
  6,24,320 6,24,320
  1. Write off Rs.2,000 as Bad-debts and provision for Doubtful Debts is to be maintained at 5% on debtors.
     
  2. Loan from X was taken on Ist May, 1993. No interest has been paid so far.
     
  3. Included in general expenses is insurance premium Rs.1,200 paid for one year ending 31st March, 1994.
     
  4. 1/3 of Wages and Salaries is to be charged to Trading A/c and the balance to P & L A/c.
     
  5. Entire stationery was used by the proprietor for own purpose.
     
  6. Closing Stock was valued at Rs.50,000.
Solution:
TRADING AND PROFIT & LOSS A/C
As the year ending 31st Dec.,1993
 
Particulars Amount Particulars Amount
  Rs.   Rs.
To Stock 1-1-1993 36,000 By Sales                    3,50,000  
To purchases                           2,20,000   Less: Return inward       6,000 3,44.000
Less: Return Outwards                7,500 2,12,500 By Closing Stock 50,000
To Carriage on purchases 4,400    
To Fuel and Power 15,500    
To wages and salaries 6,000    
To Gross Profit c/d 1,19,600    
  3,94,000   3,94,000
To Carriage on Sales 2,100 By Gross Profit b/d 1,19,600
To wages & Salaries 12,000 By Interest on Investments 2,000
To Repairs 1,520 By Miscellaneous Receipts 120
To General Expenses                  10,600      
Less: Prepaid Bad - Debts               300 10,300    
To Bad – Debts                             6,200      
Add:     Further Bad – Debts         2,000      
Add: New Provision for      
Doubtful Debts                   4,000      
12,200      
Less: Old Provision                        2,500 9,700    
To Outstanding Interest (1) 1,200    
To Net Profit transferred to      
Capital A/c 84,900    
  1,21,720   1,21,720
       
 
BALANCE SHEET
As on 31st December, 1993
 
Liabilities Amount Assets Amount
 
Bills payable
Rs.
5,200
 
Cash in hand
Rs.
2000
Creditors 30,000 Cash at Bank 18,000
X’s Loan                              10,000   Debtors                       82,000  
Add: Outstanding Interest     1,200 11,200 Less:Bad Debts             2,000  
Capital                              2,17,000
Add: Net Profit                    84,900
3,01,900
  80,000
Less: Provision for
Doubtful debts         4,000
 
 
76,000
Less: Drawings   Closing Stock 50,000
(Stationery used)                 2,000 2,99,900 Prepaid Insurance
Investments
300
20,000
    Land & Buildings 1,80,000
  3,46,300   3,46,300

Note :- (1) Interest on Loan will be calculated for eight months.
 


Example:

The balance sheet of Thapar on 1st January, 2005 was as follows:
 
Liabilities Rs. Assets Rs.
Sundry creditors
Expenses payable
Capital
15,000
1,500
50,000
Plant & machinery
Furniture & fixture
Stock
Sundry debtors
Cash at bank
30,000
3,000
13,000
14,000
6,500
  66,500
 
  66,5;00

During 2005, his Profit and Loss Account revealed a net profit of Rs. 15,300. This was after allowing for the following:

(a) Interest on capital @ 6% p.a.

(b) Depreciation on Plant and Machinery @ 10% and on furniture and fixtures @ 5%.

(c) A provision for doubtful debts @ 5% of the debtors as on 31st December, 2005.

But while preparing the profit and loss account he had forgotten to provide for (1) outstanding expenses totaling Rs. 1,800 and (2) prepaid insurance to the extent of Rs. 200.

His current assets and liabilities on 31st December, 2005 were: Stock Rs. 14,500; Debtors Rs. 20,000; Cash at bank Rs. 10,350 and Sundry creditors Rs. 11,400.

During the year he withdrew Rs. 6,000 for domestic use. Draw up his Balance Sheet at the end of the year
 
Solution:
Profit and Loss Account (Revised)
 
Particulars Rs. Particulars Rs.
To Outstanding expenses
To Net profit
1,800
13,700
By Balance c/d
By Prepaid insurance
15,300
200
  15,500   15,500
 

Balance sheet of Thapar as on 31st Dec., 2005
 
Particulars Rs. Particulars Rs.
Capital                    50,000
Add: Net profit      13,700
63,700
Less: Drawings        6,000
57,000
Add: Interest on      3,000
Capital expenses
Creditors
 
 
 
 
 
60,700
1,800
11,400
Cash at bank
Debtors                                      20,000
Less: Provision for doubtful          1,000
Plant and machinery                  30,000
Less: Depreciation                       3,000
Furniture & fixtures                      3,000
Less: Depreciation                          150
Stock
Prepaid insurance
10,350
 
19,000
 
27,000
 
2,850
14,500
200
  73,900   73,900

 

 

                     

Sequence of Accounting Procedure or the Accounting Cycle


What has been done so far shows that the accounting process in the following order:

1.  Recording the transactions in the journal or journalizing.    

2.  Preparing ledger accounts on the basis of the journal or posting into the ledger.

3.  Taking out the trial balance to prove arithmetical accuracy.

4.  Preparing the profit and loss account or the income statement for the period concerned.

5.  Preparing the balance sheet to show the financial position as the end of the period.


 





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