DK Goel Solutions Class 11 Accountancy Chapter 17 Provision and Reserves

Short Answer Questions

Question 1. 

Solution  1: According to the companies Act the term ‘Provision’ refers to any of the following amounts:-

(i) The amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets.

(ii) The amount retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy.

Below are the importance of provision:-

1.) To ascertain the true net profit of the business.

2.) To ascertain the true financial position of the business.

3.) To provide for known losses in the future.

Question 2. 

Solution 2:

Question 3.

Solution 3:

Question 4.

Solution 4:

Question 5.

Solution  5: Below are the five examples of Capital Reserve:-

1.) Profit on the sales of fixed assets.

2.) Profit on the revolution of fixed assets and liabilities.

3.) Premiums received on issue of Shares or Debentures.

4.) Profit on the purchases of a running business.

5.) Profit prior to the incorporation of a company.

Question 6.

Solution 6:

Question 7.

Solution  7:  In the addition to the normal profit, capital profits are also earned in the business from many sources. The reserves created out of such capital profits are known as Capital Reserves.

Below are the five examples of Capital Reserve:-

1.) Profit on the sales of fixed assets.

2.) Profit on the revolution of fixed assets and liabilities.

Question 8. 

Solution  8:  Secret reserves can be created in the following ways:

1.) Writing off excessive depreciation

2.) Charging Capital expenditure (such as addition to assets) to Profit and Loss Account.

3.) Treating a revenue receipt as a capital receipt (such as rent received credited to Building Account)

Very Short Answer Questions

Question 1.

Solution 1: According to the companies Act the term ‘Provision’ refers to the amount written off or retained by way of providing for depreciation, renewals or diminution in value of assets.

Question 2.

Solution 2: Below are the examples of provisions:-

1.) Provision for Depreciation of Assets

2.) Provision for Taxation.

Question 3.

Solution  3: Reserves mean amount set aside out of profit and other surpluses to meet future uncertainties. In other words a reserve is meant for meeting any unknown liability or loss in the future.

Question 4. 

Solution  4: Below are the examples of reserves:-

1.) General Reserve

2.) Capital Reserve

Question 5. 

Solution  5:

Question 6.

Solution 6: Reserve is an appropriation of profit whereas provision is change against profit.

Question 7. 

Solution  7: Example for Provision:- Provision for Depreciation of Assets.

Example for Reserve:- General Reserve

Question 8. 

Solution 8: Divided Equalisation Reserve is created to maintain steady rate of dividend. In the year in which the profits are sufficient, a part of the profit is transferred to such reserve and it is utilised to keep the dividend up in the year in which the profit are insufficient.

Question 9. 

Solution  9: This fund created to meet compensation payable to workers in case of unexpected or unknown event of an accident.

Question 10. 

Solution 10:

(i) Divide Equalisation Reserve

(ii) Workmen Compensation Fund

Question 11. 

Solution 11 : In the addition to the normal profit, capital profits are also earned in the business from many sources. The reserves created out of such capital profits are known as Capital Reserves.

Question 12. 

Solution 12: 

General Reserve:- The businessman do not withdraw the entire profit from the business but retain a part of it in the business to meet unforeseen future and uncertainties.

Specific Reserve:- It is created for a specific purpose and can be utilised only for that purpose.

Question 13. 

Solution 13: Revenue Reserve can be used in distribution of dividend.

Question 14. 

Solution 14: Profit on sale of a fixed asset is a capital profit and therefore it will be transferred to Capital Reserve.