CBSE Class 11-commerce Answered

Reserves

Provisions

 i. A reserve is an appropriation of profit.

 i. A provision is a charge on profit.

 ii. Main purpose of creating a reserve is to strengthen the financial position and to meet unforeseen liabilities or losses.

 ii. Main purpose of provision is to meet the known liability or contingency, if the amount is not determined.

 iii. Profit is not affected because it is debited to the profit and loss appropriation account.

 iii. Profit is reduced because debited to the profit and loss account.

 iv. It may be invested outside the business.

 iv. But it is not invested.

 v. It is shown on the liabilities side of Balance Sheet under the ‘Reserves and Surplus’.

 v. It is shown either as a liability under the head ‘Current Liabilities’ or as deduction from the asset.