1. Briefly write the meaning of reserve?
Ans:-Reserve is the part of profit separated by the business firm to meet the unknown liability and future loss. It is created when business has profit, in case of loss, it cannot be created.
2. Give the meaning of provision with suitable examples?
Ans:-Provision is the amount set aside from the profit to meet the known liability or loss. Provisions are created by debiting the profit and loss account. It’s creation is compulsory. Provision for bad and doubtful debts, provision for taxation, provision for depreciation etc. are the examples of provision.
3. Enumerate any four objectives of reserve/reserve fund.
Ans:-The four objectives of reserve are as follows:
a. To expand business through internal sources.
b. To meet unknown liability and losses in future.
c. To strengthen the financial position of a business.
d. To distribute the dividend uniformly over the years.
4. Define general reserve with example.
Ans:-A reserve which is created in the business firm out of profit not for the specific purpose is known as general reserve. It is created by debiting profit and loss appropriation account.
5. Mention any three objectives/advantages of general reserve.
Ans:-The following are the three objectives/ advantages of general reserve:
a. To provide or expand the additional working capital.
b. To meet unknown liability and losses in future.
c. To strengthen the financial position of a business.
6. Write the meaning of secrete reserve?
Ans:-The reserve which is created in the business firm without disclosing in the books of account is called secrete reserve. Its main is to strengthen the financial condition of the firm. It is not shown in balance sheet. It is also called hidden reserves. It is generally created by the financial institutions like bank, insurance company and other cooperative societies.
7. State any four objectives of creating secrete reserve.
Ans:-The following are the four objectives of creating secrete reserve:
a. To providing excessive depreciation of assets.
b. To undervaluing the assets
c. To charging capital expenditure to revenue
d. To overvaluing liabilities
8. Define capital reserve with suitable examples.
Ans:-The reserves which are created out of capital profits are called capital reserve. Capital profits refer to the profit earned in some incidental courses of business. It is created out of the capital profits such as:
a. Profit on sales or revaluation of assets
b. Premium on issue of shares and debentures.
9. Write the meaning of specific reserve.
Ans:-Specific reserve is a kind of revenue reserve created by the firm for a particular purpose. It cannot be utilized for any purpose other than specified. It is created by debiting profit and loss appropriation account. The following are some of the example of specific reserves.
- Dividend equalization fund
- Staff welfare fund
- Sinking fund
- Depreciation fund, etc.
10. State in brief about sinking fund.
Ans:-Sinking fund is a fund created for the purpose of repayment of liabilities and replacement of fixed assets. In order to create this fund, a certain amount is separated by appropriating out of the profit and loss appropriation account. The same amount is withdrawn from business each year and invested in profitable sector. Such amount can be utilized for redemption of liabilities and replacement of fixed assets.
11. Write any three differences between provision and reserve.
Ans:-Following are the three differences between provision and reserve:
| Basis | Reserves | Provisions |
| Relation with profit | It is an appropriation of profit. | It is charge to profit and loss account. |
| Compulsion | It can be created only when there is profit. | It must be charged to profit and loss account before calculating net profit or loss |
| Need | It is created for unknown liabilities. | It is created for meeting a definite liability. |
| Investment | Reserves reduce divisible profits and can be invested in outside securities. | Provisions reduce the net profits and are not invested in outside securities. |