Tag: reserves

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Multiple choice elements of accounts company final accounts reserves provisions provisions and reserves

 Reserve is created after the calculation of_______.

  1. Net loss

  2. Net profit

  3. Gross profit

  4. Capital
Reveal answer Fill a bubble to check yourself
B Correct answer
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. 

Multiple choice elements of accounts company final accounts reserves provisions provisions and reserves

Creation of reserve reduces taxable profits of the business.

  1. True

  2. False
Reveal answer Fill a bubble to check yourself
B Correct answer
Explanation

Since reserves are neither expenses nor losses, so these are not charged to profit & loss Account rather these are debited to Profit & Loss Appropriation Account which is prepared after Profit and Loss Account.

Creation of reserve does not reduce the net profit but only reduces the divisible profits.