Write short notes on: Reserves and provisions

Auditing and Assurance Revision Questions and Answers

Answer
Reserves and provisions
Reserves are amounts appropriated out of profits which are not intended to meet any liability, contingency, commitment or diminution in the value of assets known to exist at the date of the Balance Sheet. In contradistinction, provisions are amounts charged against revenue to provide for:
 depreciation, renewal or diminution in the value of assets, or
 a known liability, the amount whereof cannot be determined with substantial accuracy, or
 a claim which is dispute.
Amounts contributed or transferred from profits to make good the diminution in assets values are described as provision. Provisions are normally charged to the profit and loss account before arriving at the amount of profit. Reserves are appropriated out of profits.



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