Subject: Other
Reserve may be created for different purposes for which different types of the reserve are created. They are mentioned below:
These types of the reserve are created out of reserve profit. They are available to distribute as a dividend to shareholders. There are two types of revenue reserve:
It is also called as a free reserve. It is created out of revenue profit to strengthen the financial position of a business. It is not created for specific purpose. It is created only when there is sufficient profit. It is shown on the debit side of profit and loss appropriation account. It reduces distributable profits. If it is not utilized in future, it can be distributed as a dividend in future.
Objectives and Advantages
The followings are the advantages/objectives of general reserve.
Disadvantages
The following are the disadvantages of general reserve.
This type of reserve is created for specific purposes. It is created for meeting known liabilities. It is utilized for the purpose for which it was created. It is created whether there is profit or not. It is necessary to create such reserve to ascertain the true profit of the business during a particular period of time. It is shown on the debit side of the profit and loss appropriation account. It reduces the retained earnings. The following are some of the examples of the specific reserve.
The different types of specific reserves are mentioned below;
Capital reserves are those reserve which are created for our profit. The profit which is not earned through the normal course of business is called capital profit. Such reserves cannot be utilized for the distribution of dividend to the shareholders. Capital reserve is created out of the capital profits such as;
The capital reserve may be used for writing off the capital loss. It is also used for issue of bonus shares. It is shown on the liability side of balance sheet.
A secret reserve is the one which is not disclosed on the balance sheet. It is termed as "Internal reserve or Inner reserve". There are bays of creating secret reserves. The main objectives of creating secret reserve are to show the better financial condition than the actual.
A secret reserve is created by the following ways:
Objectives
The following are the objectives of creating secret reserve
Advantages
The following are the advantages of creating secret reserve
Disadvantages
The following are the disadvantages of creating secret reserve
Following particulars are provided:
Opening provision for bad debts Rs.10,000
Bad debts Rs.8,000
Closing provision for bad debts Rs.9,000
Required: Provision for bad debts account
Solution:
Dr. | Provision for bad debts a/c | Cr. |
Particulars | Amt (in Rs.) | Particulars | Amt (in Rs.) |
To bad debts | 8,000 | By balance b/d | 10,000 |
To balance c/d | 9,000 | By Profit and loss a/c | 7,000 |
17,000 | 17,000 | ||
Following information are given:
Opening provision for bad debts Rs.1,000.
Bad debts written off during the year Rs.2,000.
Closing balance of debtors Rs.50,000.
The provision for bad debts has been maintained at 5% of the debtors.
Required: Provision for bad debts a/c
Solution:
Dr. | Provision for bad debts a/c | Cr. |
Particulars | Amt (in Rs.) | Particulars | Amt (in Rs.) |
To bad debts | 8,000 | By balance b/d | 10,000 |
To balance c/d | 9,000 | By Profit and loss a/c | 7,000 |
(5% of Rs.50,000) | (balancing figure) | ||
17,000 | 17,000 | ||
A company has a policy to maintain a provision for bad debts at 5% of the debtors. The following extracts are provided to you for the year ended December 31st 2014.
|
Debit Amt (Rs.) |
Credit Amt (Rs.) |
Trade debtors |
2,00,000 |
|
Bad debts |
5,000 |
|
Opening provision for bad debt |
|
7,000 |
Required: Provision for bad debts
Solution:
Dr. | Provision for bad debts a/c | Cr. |
Date | Particulars | Amt (in Rs.) | Date | Particulars | Amt (in Rs.) |
31-12-2014 | To bad debts | 5,000 | 31-12-2014 | By balance b/d | 7,000 |
To balance c/d | 10,000 | By Profit and loss a/c | 8,000 | ||
15,000 | 15,000 | ||||
Following information are provided to you:
Closing balance of debtors Rs.32,000
Bad debts written off during the year Rs.800
Opening provision for bad debts Rs.1,200
The provision of bad debts has been maintained at 5% of the debtors.
Required: Provision for doubtful debts account
Solution:
Dr. | Provision for bad debts a/c | Cr. |
Particulars | Amt (in Rs.) | Particulars | Amt (in Rs.) |
To bad debts | 800 | By balance b/d | 1,200 |
To balance c/d | 1,600 | By Profit and loss a/c | 1,200 |
(5% of Rs.50,000) | (balancing figure) | ||
2,400 | |||
The following information are supplied to you:
Opening balance of provision for doubtful debts a/c Rs.14,000
Bad debts written off during the year Rs.5,000
Sundry debtors at the close of the year Rs.15,000
Provision for doubtful debts is required @ 5% on sundry debtors.
Required:
Provision for doubtful debts a/c
Effect on profit and loss a/c and balance sheet
Solution:
Dr. | Provision for bad debts a/c | Cr. |
Particulars | Amt (in Rs.) | Particulars | Amt (in Rs.) |
To bad debts | 5,000 | By balance b/d | 14,000 |
To Profit and loss a/c | 8,250 | ||
To balance c/d | 750 | ||
14,000 | 14,000 | ||
Dr. | Profit and loss a/c | Cr. |
Particulars | Amt (in Rs.) | Particulars | Amt (in Rs.) | |
By old provision for doubtful debts | 14,000 | |||
Less: Bad debts | 5,000 | |||
9,000 | ||||
Less: New provision for doubtful debts | 750 | 8,250 |
Balance Sheet
Liabilities | Amt (in Rs.) | Assets | Amt (in Rs.) | |
Sundry debtors | 15,000 | |||
Less: Provision for doubtful debts | 750 | 15,750 |
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