Reserves, provisions and
current liabilities are all created by a debit to profit and loss account.
Reserves are debited to profit and loss appropriation account while provisions
are debited to the general profit and loss at the time of the balance sheet.
current liabilities are all created by a debit to profit and loss account.
Reserves are debited to profit and loss appropriation account while provisions
are debited to the general profit and loss at the time of the balance sheet.
Provision may be for
specific items existing at the date of the balance sheet which cannot be
closely estimated. It follows that an excessive provision should, in fact, be
treated as a reserve provisions may be made for depreciation, bad debts,
discounts on debtors, and repairs and renewals.
specific items existing at the date of the balance sheet which cannot be
closely estimated. It follows that an excessive provision should, in fact, be
treated as a reserve provisions may be made for depreciation, bad debts,
discounts on debtors, and repairs and renewals.
Capital reserves – These
are my reserves which are not available for distribution as dividends.
are my reserves which are not available for distribution as dividends.
They may be created.
(a) For statutory reasons (share premiums).
(b) Because the memorandum and articles so decide;
(c) For other reasons
(d) Because
the directors so decide. In the case, the directors are quite free to transfer
such profits to revenue whenever they wish.
the directors so decide. In the case, the directors are quite free to transfer
such profits to revenue whenever they wish.
Distinction between a provision and a reserve
The distinction between a
provision and a reserve can be summarized in this way: Suppose there is a
charge which is difficult to determine; example depreciation. If no estimated
charge were made in the profit and loss account, this would result in higher
profits being stated and consequently, a greater distribution of income.
provision and a reserve can be summarized in this way: Suppose there is a
charge which is difficult to determine; example depreciation. If no estimated
charge were made in the profit and loss account, this would result in higher
profits being stated and consequently, a greater distribution of income.
To prevent such result, a
provision is made by debiting the profit and loss account and crediting “provision
for depreciation” thus reducing profits by the amount of depreciation.
provision is made by debiting the profit and loss account and crediting “provision
for depreciation” thus reducing profits by the amount of depreciation.
Calculation and allowance
for provisions, then, makes for a more realistic estimate of operating profits
available for dividend.
for provisions, then, makes for a more realistic estimate of operating profits
available for dividend.
It still does not follow
that all the profit will be distributed. If it is decided that it is
inadvisable to spend all the profit by distribution to owners of the business,
this can accomplished by carrying some of the profits to a Reserve.
that all the profit will be distributed. If it is decided that it is
inadvisable to spend all the profit by distribution to owners of the business,
this can accomplished by carrying some of the profits to a Reserve.
A debit would be made in
the profit and loss appropriation account and a credit to reserve account. At a
later date such as sum may be distributed to the owner.
the profit and loss appropriation account and a credit to reserve account. At a
later date such as sum may be distributed to the owner.
On the other hand assume a
person borrow a cash in order to commence a business, agreeing to repay the
loan the loan out of profit.
person borrow a cash in order to commence a business, agreeing to repay the
loan the loan out of profit.
Effectively, the same is
true of a liability company, so appropriations for reserves of this nature may
be for repayment of capital sums and may be called capital reserves and are not
free for distribution or spending.
true of a liability company, so appropriations for reserves of this nature may
be for repayment of capital sums and may be called capital reserves and are not
free for distribution or spending.
