Q1. What is meant by Provision?
Ans. Provision is an amount set aside by charging it in the Profit and Loss Account to provide for a known liability the amount of which cannot be determined with accuracy.
Q2. Give two examples of Provisions.
(i) Provision for Depreciation.
(ii) Provision for Repairs.
Q3. What is meant by Reserves?
Ans. Reserve is an amount set aside out of profits. It is an appropriation of Profits.
Q4. What are major types of Reserves?
(i) Revenue Reserve.
(ii) Capital Reserve.
Q5. What is meant by General Reserve?
Ans. General Reserve is the amount set aside out of profits for no specific purpose.
Q6. What is meant by Capital Reserve?
Ans. Capital Reserve means reserve created out of Capital Profits.
Q7. Give two examples of Capital Reserve.
(i) Profit earned prior to incorporation.
(ii) Premium on issue of shares or debentures (Securities Premium).
Q8. What is meant by Revenue Reserve?
Ans. Revenue Reserves are the reserves being the amount set aside out of revenue profits.
Q9. What is meant by Specific Reserve?
Ans. Specific Reserve is the reserve created for a specific purpose and can be utilised only for that purpose.
Q10. What is meant by Reserve Fund?
Ans. The term ‘Reserve Fund’ means reserve the amount of which has been invested outside the business.
Q11. Give one example of each of ‘provision’ and ‘reserve’.
Provision : Provision for Tax.
Reserve : General Reserve.
Q12. Differentiate between Revenue Reserve and Capital Reserve on the basis of source.
Ans. Revenue Reserve is created out of business profits whereas Capital Reserve is created out of capital profits.
Q13. Give one difference between provision and reserve.
Ans. Provision is a charge on profit whereas Reserve is an appropriation of profit.
Q14. Do you think that a Provision is a charge against profit?
Ans. Yes, a Provision is a charge against profit for the purpose of providing for any liability or loss.
Q15. If the amount of a known Liability can be ascertained with accuracy, it should be treated as a Liability or a Provision. Comment.
Ans. It should be treated as a liability and not a Provision.
Q16. A provision can be specific or general. Do you agree?
Ans. A Provision can be specific, e.g., provision against a particular debtor or general, e.g., expressed as a percentage of total debtors.
Q17. Reserve is not a liability in the real sense. Do you agree with this statement?
Ans. Yes, Reserve is not a liability in the real sense. It represents accumulated divisible profit which belongs to the shareholders or partners just like capital and has not been distributed as dividend as yet; that is why it is shown on the liabilities side of the Balance Sheet.
Q18. Capital Reserves are freely distributed as profits. Comment.
Ans. No. Capital Reserves are not freely distributed as profits.
Q19. Capital Reserve may or may not involve any receipts of cash. Do you agree?
Ans. Yes. Capital Reserve may or may not involve any receipts of cash.