Tag: provisions and reserves

Questions Related to provisions and reserves

The provisions relating to inter-corporate loans are inter-alia laid down in :

accountancy provisions and reserves reserves provisions provision and reserves

  1. Section 370 of the Companies Act 1956

  2. Section 372 of the Companies Act 1956

  3. Section 372A of the Companies Act 1956

  4. Section 371 of the Companies Act 1956

Show answer
Correct Option: A
Explanation:

As per Section 370 of the companies Act 1956 had the provisions related to inter-corporate loans. According to this section No company (the lending company") shall make any loan to, or give any guarantee, or provide any security, in connection with a loan made by any other person to, or to any other person by, anybody corporate , unless the making of such loan, the giving of such guarantee or the provision of such security has been previously authorised by a special resolution of the lending company.


Further, Section 370 of companies Act 1956 has been repealed by Section 186 of New Companies Act 2013

Give journal entry for:
For creating provision for doubtful debts.

accountancy provisions and reserves reserves provisions provision and reserves

  1. Provision for doubtful debts A/c    Dr.

    To Profit and Loss A/c

  2. Profit and Loss A/c      Dr.

    To Provision for doubtful debts A/c

  3. Bad debts A/c    Dr.

    To Sundry debtors A/c

  4. Profit & Loss A/c    Dr.

    To Bad debts A/c

Show answer
Correct Option: B
Explanation:

Provision for doubtful debt is created for the anticipated loss due to non recovery of the debtors amount. It is a charge to the profit & loss account. 

Following journal entry will be passed:

Profit & Loss A/c                                      Dr.
  To Provision for doubtful debts A/c

Which of the following is created by debiting the Profit and Loss Account ?

accountancy provisions and reserves reserves provisions provision and reserves

  1. Provision.

  2. Sinking fund for redemption of debentures.

  3. Dividend equalization fund.

  4. All of these.

Show answer
Correct Option: A
Explanation:

Provisions are created for anticipated or estimated future losses or against the expenses which are due but not paid. 

Provisions are always created from the profit & loss account. 

Provision can be created for __________.

accountancy provisions and reserves reserves provisions provision and reserves

  1. Current assets

  2. Liabilities & assets

  3. Valuation adjustment for fixed asset

  4. All of the above

Show answer
Correct Option: D
Explanation:

A provision is an amount that you put in aside in your accounts to cover a future liability.
The purpose of a provision is to make a current year’s balance more accurate, as there may be costs which could, to some extent, be accounted for in either the current or previous financial year. These costs that distinctly belong to a specific year could be misleading if accounted for in the future.
A provision is not a form of saving, even though it is an amount that is put aside for a future plausible cost or obligation. Provisions resulting impact is a reduction in the company's equity.
When accounting, provisions are recognized on the balance sheet and then expensed on the income statement.

Provision can be created for any of the foloowing:

1. Current assets

2. Liabilities and assets

3. Valuation adjustment for fixed asset


Debtors are of $Rs.30000$
Bad debts are of $Rs. 6000$
Rate of provision for bad debt is $20$%
State what is the amount of Provision?

accountancy provisions and reserves reserves provisions provision and reserves

  1. $Rs.4800$

  2. $Rs.5000$

  3. $Rs.4000$

  4. $Rs.7000$

Show answer
Correct Option: A
Explanation:

Provision for bad debts is created towards anticipated bad debts based on a certain percentage. 

Amount of provision for bad debts is calculated on the net debtors i.e. after deducting the actual bad debts from the debtors. 
Solution to the given problem is as under:

Debtors                           $Rs.30000$
Less: Bad Debts             $Rs. 6000$
                                        ----------------
Balance debtors             $Rs.24000$
                                       -----------------
Provision for bad debts @$20$% on $Rs. 24000$= $Rs.4800$

Give journal entry for:
Bad debts written off.

accountancy provisions and reserves reserves provisions provision and reserves

  1. Bad debts A/c Dr.

    To Profit & loss A/c

  2. Profit & Loss A/c Dr.

    To Provision for doubtful debts A/c

  3. Profit & loss A/c Dr.

    To Sundry debtors A/c

  4. None of the above

Show answer
Correct Option: C
Explanation:

Amount which is not recoverable from the debtors is called bad debts. Bad debts has to be debited as an expense/loss and credited to sundry debtors account. 


1. Bad Debts A/c                                 Dr.
      To Sundry Debtors A/c 

Bad debts is a loss for the organization and should be debited to profit & loss account. 

2. Profit & Loss A/c                                Dr.
          To Bad Debts a/c


Instead of passing 2 separate entries, only 1 comprehensive entry can be passed:
Profit & loss A/c   Dr.
      To Sundry Debtors A/c

Debtors are of $Rs.20000$
Bad debts are of $Rs. 3000$
Rate of provision for bad debt is $10$%
State the amount for Provision?

accountancy provisions and reserves reserves provisions provision and reserves

  1. $Rs.1800$

  2. $Rs.2000$

  3. $Rs.1700$

  4. $Rs.2500$

Show answer
Correct Option: C
Explanation:

Provision for bad debts is created towards anticipated bad debts based on a certain percentage. 

Amount of provision for bad debts is calculated on the net debtors i.e. after deducting the actual bad debts from the debtors. 
Solution to the given problem is as under:

Debtors                           $Rs.20000$
Less: Bad Debts             $Rs. 3000$
                                        ----------------
Balance debtors             $Rs.17000$
                                       -----------------
Provision for bad debts @$10$% on $Rs.17000$= $Rs.1700$

Debtors are of $Rs.20000$
Bad debts are of $Rs.5000$
Rate of provision for bad debt is $15$%
State the amount for Provision?

accountancy provisions and reserves reserves provisions provision and reserves

  1. $Rs.5000$

  2. $Rs.2250$

  3. $Rs.3500$

  4. $Rs.2000$

Show answer
Correct Option: B
Explanation:

Provision for bad debts is created towards anticipated bad debts based on a certain percentage. 

Amount of provision for bad debts is calculated on the net debtors i.e. after deducting the actual bad debts from the debtors. 
Solution to the given problem is as under:

Debtors                           $Rs.20000$
Less: Bad Debts             $Rs. 5000$
                                        ----------------
Balance debtors             $Rs.15000$
                                       -----------------
Provision for bad debts @$15$% on $Rs.15000$= $Rs.2250$

A reserve is a ______________ against Profits.

elements of accounts company final accounts reserves provisions provisions and reserves

  1. Charge

  2. Deducted

  3. Added

  4. Appropriation

Show answer
Correct Option: D
Explanation:

Distribution of Profits against a reserve head to meet future needs are called appropriations. Eg. General Reserve, Revenue Reserve. 

 Reserve is created after the calculation of_______.

elements of accounts company final accounts reserves provisions provisions and reserves

  1. Net loss

  2. Net profit

  3. Gross profit

  4. Capital

Show answer
Correct Option: B
Explanation:

Reserves & surplus fund is created out of profits that are to be shared between the partners or share holders. Therefore fund created out of profit is a liability to the company and can be created only after the calculation of profit. Reserves & Surplus fund is created to meet future contingencies. If the contingency does not arise as expected this fund can be distributed among partners or distributed as dividends among shareholders. It can be used for issuing bonus shares. The decision how to make use of the funds will be done by the partners or in the case of a company in the AGM.