Theory question 101
Bad Debts and ProvisionsSection A
1. (a) State three distinguishing features between reserves and provisions. (b) State two types of reserves with an example each.
Show the model answer
(a) Any three: reserves are appropriations of profit, provisions are charges against profit; reserves are not made for any known liability or loss, provisions are for a known liability or loss whose amount cannot be measured accurately; reserves form part of owners' capital (shareholders' funds), provisions are deducted from assets or shown as liabilities; reserves can be created only when there is profit, provisions must be made whether there is profit or not; revenue reserves can be distributed as dividends, provisions cannot.
(b) Capital reserve – e.g. share premium, revaluation surplus, capital redemption reserve. Revenue reserve – e.g. general reserve, retained profit (profit and loss balance).
Reserve = appropriation of profit; provision = charge against profit.