Reserves, Provisions And Funds

Reserves:

 A reserve is an appropriate of profits to strengthen the liquid resources of the business in the sense that profits to the extent of reserves are not withdrawn by the proprietor or partners or shareholders in the case of a limited liability company. Reserves are generally classified as general reserves, specific reserves and capital reserves. A general reserve is one which is created to meet a contingent liability not specifically mentioned or for any other general purpose. Such reserve is also known as a free reserve or revenue reserve. On the other hand, specific reserve is created for a specific purpose such as Dividend equalization reserves, Investment Fluctuation Reserve, Debentures Redemptions Reserve and so on. Capital Reserve is that reserve which is not available for dividend distribution. It is generally created out of capital profits such as pre-incorporation profits, profits resulting from the sale of fixed or capital asset and profits on the reissue of forfeited shares by a joint stock company.  Other examples of capital reserves are Share Premium Account and Capital Redemption Reserve Account Which is Statuary capital reserves and can be utilized within the framework of legal provisions of the Companies Act.

Provisions:

A provisions is any amount written off or retained by way of providing for depreciation, renewals, or diminutions in value of assets, or retained by way of providing for any known liability of which the amount of liability cannot be determined with substantial accuracy. Examples of Provisions are: Provisions for doubtful debts, provision for repairs, reserves for discount on debtors etc. A provision may therefore be either in respect of loss in value of an asset, incurred or written off on an estimate as a result of either depreciation or diminution on its expenses incurred or in respect of a claim which is disputed but which may have to be paid if the dispute is settled against the firm. A provisions, therefore, is distinguishable from a liability in as much as that the obligation, in respect of which it has been made, may not arise either wholly or partially. The main points of distinction between a provision and reserves are:

(1)    A provision is charge against the profits and thus created even if there are not profits. But a reserve is an appropriation of the profit and can be created only when there are sufficient profits.

(2)    A provision is created for some specific object and can be utilized only for that object. But a reserve is meant for any contingency and therefore can be utilized for any future liability or loss.

(3)    A provision cannot be utilized for dividends while unutilized reserves can be used for dividends.

(4)    Provision cannot be transferred to general reserves while the reserves, if necessary, can be transferred to provisions.

(5)    Provisions are never invested outside the business while reserves can be invested outside the business (and they are known as reserve funds).

(6)    A provision is deducted from the item for which it is created while reserves are shown in the liabilities side of the balance sheet.

(7)    Provisions reduce net profits while reserves reduce only divisible profits.

Reserves Funds:

A reserve fund is a reserve which is represented by securities earmarked for it; if the amount of reserve is invested in outside securities, it will become reserve fund. The term reserve alone will indicate that the amount represented by the reserve is being utilized in the business itself.

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