Question

State with reasons whether the following statements are True or False ;
(i) Making excessive provision for doubtful debits builds up the secret reserve in
the business.
(ii) Capital reserves are normally created out of free or distributable profits.
(iii) Dividend equalisation reserve is an example of general reserve.
(iv) General reserve can be used only for some specific purposes.
(v) ‘Provision’ is a charge against profit.
(vi) Reserves are created to meet future expenses or losses the amount of which is
not certain.
(vii) Creation of reserve reduces taxable profits of the business.

Answer 1

Answer:

true true true false true false

Answer 2

Explanations are given to the answers for better understanding.

Explanation:

(i) True

Making excessive provisions creates secret reserve in the business.

(ii) False

It is not created out of free profit. capital reserve is the profit on sale of capital assets.

(iii) False

General reserve is different from dividend equalisation reserve. Dividend equalisation reserve is created to maintain stability in the distribution of dividend in spite of changing in the earning of the company.

(iv) False

There is no such restrictions. It is a portion of profit that is kept aside so that it can be used in the future.

(v) True

Provision is charge.

But you need to note that they can also be the appropriation against the profits.

(vi)  False

Reserves are kept aside for particular purposes such as to purchase machinery or any other fixed assets etc.

(viii) False

Creation of reserve does not reduces the taxable profit.