Amity Business School

Amity Business School

MBA Class of 2015, Semester I

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Provisions

According to The Indian Companies Act,provision can be defined as any amount. written off or retained by way of providing for depreciation , renewal diminution in the value of assets or retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.

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Provisions
1. It is created by debiting the profit and loss account.

2. It is created to meet a known liability or a specific contingency, e.g.. provision for bad and doubtful debts, or provision for depreciation etc.
3. A provision is created irrespective of whether there is profit or loss in the business. 4. It is not available for distribution as dividend among shareholders. 5. A provision is made for a definite amount and, therefore, a definite sum is set aside every year to meet the known contingency. 6. Making of a provision is a must to meet known liability or contingency.

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Provisions
Thus provisions are the amounts set aside out of profits and other surpluses to provide for:1. Depreciation, Renewals or diminution in the value of assets 2. Any known liability of which the amount cannot be determined with substantial accuracy.

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Provisions
Provisions are generally created for the following:1. Provision for Depreciation 2. Provision for Bad and Doubtful Debts 3. Provision for Discount on Debtors 4. Provision for taxation 5. Provision for Repairs and Renewals

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Reserves

This term means amount set aside out of profits and other surplus which are not designed to meet any liability or diminution in value of assets known to exist at the date of B/S.

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Reserves Basic purpose of creating a reserve is to provide for unexpected losses in future and also retain profits within business to provide funds for expansion of the business.

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Reserves
1. It is created by debiting the profit and loss appropriation account. 2. It is created to meet an unknown liability, or to strengthen the financial position of the company or for equalization of dividends etc. 3. A reserve is created only when there is profit in the business. 4. It can be distributed among shareholders as dividend. 5. The reserve is created without taking into consideration the actual amount required except in the case of redemption of debentures when a definite sum is set aside. 6. Creation of reserve depends upon the financial policy of the business and discretion of its management.

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Reserve Fund

The term Reserve Fund is used for the amount of reserve which has been invested in outside securities. Examples of Reserve Fund are employees welfare fund, pension fund, gratuity fund etc. Profit set aside and used in the business is a reserve. But profit set aside and invested outside the business is a reserve fund. Thus, the use of the term 'fund' indicates investment of reserve outside the business.

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Distinction between provision and Reserve Provision 1. It is made to meet a known liability for depreciation of assets. 2. The amount set aside is used only to meet the specific purpose for which provision was made. 3. It is to be made even if there are no profits. Reserve 1. These are created to meet unexpected contingencies likely to arise in future. 2. Amount can be used for any liability or loss. 3. It is created only when there are sufficient profits.