Page 159 - CA Inter Audit PARAM

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(h) Surplus i.e. balance in Statement of Profit & Loss disclosing allocations and appropriations such as
dividend, bonus shares and transfer to/from reserves etc.

(Additions and deductions since last balance sheet to be shown under each of the specified heads)

Note: A reserve specifically represented by earmarked investments shall be termed as a ‘fund’.
Note: Debit balance of statement of profit and loss shall be shown as a negative figure under the head
‘Surplus’. Similarly, the balance of ‘Reserves and Surplus’, after adjusting negative balance of surplus, if
any, shall be shown under the head ‘Reserves and Surplus’ even if the resulting figure is in the negative.

QNO B/S( Reserve vs Provision & Capital vs Revenue Old Course -- (M19M/M19R/N22M/M21E)
AIFS.19 Reserve) #Unique
Reserves are amounts appropriated out of profits whereas on the contrary, provisions are amounts charged
against revenue. Discuss explaining the difference between the two and also clearly explain revenue reserve
and capital reserve.
OR
Explain the difference between reserves and provisions.
OR

Specific reserves may sometimes be created under contractual obligation or legal compulsion. Explain with
examples.
OR
Reserves are a vital source of financing by internal means. Explain and also discuss the meaning
of reserves along with revenue reserve and capital reserve.

Answer ➢ General Concept – Reserve V/s Provision
Reserves
are amounts appropriated out of profits that are not intended to meet any liability, contingency,
commitment or diminution in the value of assets known to exist as at the date of the Balance
Sheet.

Provisions
On the contrary, provisions are amounts charged against revenue to provide for:
• Asset
o Renewal or diminution in the value of assets;
o Amounts contributed or transferred from profits to make good the diminution in value
of assets due to the fact that some of them have been lost or destroyed as a result of
some natural calamity or debts have proved to be irrecoverable are also described as
provisions. Provisions are normally charged to the Statement of Profit and Loss before
arriving at the amount of profit. Reserves are appropriations out of profits.

• Liability
o a known liability, the amount whereof could only be estimated and cannot be
determined with accuracy; or
o a claim which is disputed.

➢ Difference between Reserves and Provisions
Detail Definition
• Provisions
The difference between the two is that provisions are amounts set aside to meet specific/
identified liabilities or diminution in recoverable value of assets. These must be provided for
regardless of the fact whether the Company has earned profit or not.

• Reserves
Represent amounts appropriated out of profits, held for equalizing the dividends of the
company from one period to another or for financing the expansion of the company or for
generally strengthening the company financially.

Net worth Computation
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