CBSE Class 11-commerce Answered
Expert Answer
|
Basis |
Provision |
Reserve |
|
Basic nature |
It is a charge against profit |
It is an appropriation of profit |
|
Purpose |
It is created to meet specific liabilities or contingencies |
It is made for strengthening the financial position of the business. Some reserves are also mandatory under law. |
|
Accounting treatment |
It is recorded on the debit side of profit and loss account |
It is recorded on the debit side of the profit and loss appropriation account |
|
Presentation in balance sheet |
It can be shown either by way of deduction from the item on the assets side for which it is created or in the liabilities side along with the current liabilities |
It is shown on the liabilities side after capital |
|
Utilisation for dividend |
It cannot be utilised for dividend distribution |
It can be utilised for dividend distribution |
|
Investment outside the business |
It is never invested outside the business |
It can be invested outside the business |
|
Effects |
It reduces net profits |
It reduces only divisible profit |
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