TS Grewal Class 11 Accountancy Chapter 14 Provisions and Reserves Solutions

The solutions in TS Grewal for Chapter 14 follow a specific methodology for the 'Provision for Discount on Debtors'. The key journal entries are:

• For Creating the Provision: This entry is passed at the end of the accounting year to create the provision.
  Profit & Loss A/c Dr.
      To Provision for Discount on Debtors A/c

• When Discount is Actually Allowed: This entry is passed during the next year when a discount is given to a debtor.
  Discount Allowed A/c Dr.
      To Debtor's A/c

• For Transferring Discount to Provision Account: At the end of the next year, the discount allowed is transferred to the provision account.
  Provision for Discount on Debtors A/c Dr.
      To Discount Allowed A/c

Distinguishing between a Provision and a Reserve is crucial because it fundamentally affects the calculation of profit and the presentation in financial statements. A Provision is a charge against profit made to cover a known liability or expected loss (e.g., Provision for Bad Debts). It is debited to the Profit & Loss Account before calculating net profit. In contrast, a Reserve is an appropriation of profit, meaning it's a part of the profit set aside to strengthen the company's financial position (e.g., General Reserve). It is debited to the Profit & Loss Appropriation Account after the net profit has been calculated. Misclassifying one as the other will lead to an incorrect Net Profit and misrepresentation of the firm's financial health.

In the TS Grewal solutions, both General and Specific Reserves are treated as an appropriation of profit. However, their purpose and flexibility differ:

• General Reserve: This is created without any specific purpose. It strengthens the overall financial position and can be used for any future need, such as business expansion, dividend equalisation, or covering unexpected losses. It appears under 'Reserves and Surplus' in the Balance Sheet.

• Specific Reserve: This is created for a clearly defined purpose and can only be used for that purpose. Examples include 'Debenture Redemption Reserve' or 'Investment Fluctuation Reserve'. Once the purpose is fulfilled, the balance may be transferred to the General Reserve.

The key difference in solving problems is understanding the usage constraint of a specific reserve versus the flexibility of a general reserve.

The core difference lies in their source and availability for dividend distribution. A Revenue Reserve (like General Reserve or Retained Earnings) is created from the profits earned during the normal course of business operations. These reserves are available for distribution to shareholders as dividends. A Capital Reserve is created from capital profits, which are non-operating gains like profit on the sale of a fixed asset or profit on the reissue of forfeited shares. As per law, capital reserves are generally not available for distribution as cash dividends. In problem-solving, you must correctly identify the source of profit before creating the appropriate reserve.

Yes, a provision is created specifically for a known liability where the amount cannot be determined with certainty. This follows the Prudence or Conservatism Principle, which advocates for recognizing all anticipated losses. The TS Grewal solutions demonstrate that the amount is determined by making a best possible estimate based on available information and past experience. For instance, the 'Provision for Doubtful Debts' is not an exact science but an estimate calculated as a percentage of debtors, a method consistently applied in the textbook's practical problems.

When an old provision exists, the amount debited to the Profit & Loss Account is the net amount required for the year. The steps are:

• Step 1: Add the 'Further Bad Debts' (from adjustments) to the 'Bad Debts' (from Trial Balance).

• Step 2: Calculate the 'New Provision for Doubtful Debts' on the Sundry Debtors (after deducting Further Bad Debts).

• Step 3: Add the total Bad Debts (from Step 1) and the New Provision (from Step 2).

• Step 4: From this total, subtract the 'Old Provision for Doubtful Debts' given in the Trial Balance.

The final amount derived in Step 4 is the net figure that will be debited to the Profit & Loss Account for the current year.

A Secret Reserve is a hidden reserve not disclosed in the Balance Sheet, created by overstating liabilities or understating assets (e.g., charging excessive depreciation). While it might make the business seem more stable in lean years, it is heavily discouraged because it violates the fundamental Principle of Full Disclosure. This principle states that financial statements must present a 'true and fair' view of the company's financial position. Secret reserves distort this view by deliberately misrepresenting asset and liability values, which can mislead investors, creditors, and other stakeholders about the actual profitability and financial health of the business.