ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Depreciation and its Accounting Treatment

Meaning of Depreciation

Depreciation means fall in book value of a depreciable fixed asset because of its wear and tear,
passage/efflux of time, obsolescence or accident. It is charged on all fixed assets except land because of
its infinite economic life.

Characteristics of Depreciation
 Depreciation is decline in the book value of tangible fixed asset.
 It decreases only the book value of an asset and not the market value of an asset.
 It is a non-cash expense as it does not involve cash.
 It is permanent, gradual and continuous in nature.
 It is an expense and therefore is debited to the profit and loss account.
 It is the process of writing off the capital expenditure which has already been incurred over its useful
life.
 It is a process of allocation of cost of an asset to its useful life span and not the process of valuation of
asset.
 It is only used for tangible fixed asset and cannot be used for wasting and fictitious assets. For
example, depletion of natural resources and amortisation of goodwill.

Concepts Related to Depreciation

 Depletion: It is related to the extraction of natural resources such as quarries and mines which leads to
decline in the availability of the quantity of asset or material.
 Amortisation: Writing off the cost of intangible assets such as trade mark, copyright and patents over
its useful life is known as amortisation.
 Obsolescence: Obsolescence means decrease in the value of asset because of innovation or
improved technology, change in taste or fashion or inadequacy of the existing asset because of the
improved demand.

Causes of Depreciation
 Use of asset i.e. wear and tear: There exists a normal wear and tear because of constant use of fixed
assets which leads to fall in the value of the assets.
 Passage/efflux of time: Whether assets are used or not, with the passage of time, its effective life will
decrease.
 Obsolescence: Because of new technologies, innovations and inventions, assets purchased today
may become outdated by tomorrow which leads to the obsolescence of fixed assets.
 Accidents: An asset may lose its value because of mishaps such as a fire accident, theft or by natural
calamities and are permanent in nature.

Need for Providing Depreciation

 To ascertain the true profit or loss: True profit or loss can be ascertained when all the expenses
and losses incurred for earning revenues are charged to profit and loss account. Assets are used for
earning revenues and its cost is charged in the form of depreciation from profit and loss account.

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

 To show true and fair view of the financial position: If depreciation is not charged, assets will be
shown at a higher value than their actual value in the balance sheet. Consequently, the balance sheet
will not reflect true and fair view of financial statements.
 To retain out of profit funds for replacement: Unlike other expenses, depreciation is a non-cash
expense. So, the amount of depreciation debited to the profit and loss account will be retained in the
business. These funds will be available for replacement of fixed assets when its useful life ends.
 To ascertain correct cost of production: Depreciation on the assets, which are engaged in
production, is included in the cost of production. If depreciation is not charged, the cost of production is
underestimated which will lead to low selling price, and thus leads to low profit.
 To comply with legal requirement: To comply with the provisions of the Companies Act and Income
Tax Act, it is necessary to charge depreciation.

The factors involved in providing depreciation are

 Historical (Original) cost of the asset: The total cost of an asset is taken into consideration for
ascertaining the amount of depreciation. The total cost of an asset includes all expenses incurred up
to the point where the asset is ready for use such as freight expenses and installation charges.
Total cost =Purchase price+ Freight expenses+ Installation charges
 Estimated net residual value: It is estimated as the net realisable value of an asset at the end of its
useful life. It is deducted from the total cost of an asset and the difference is written off over the useful
life of the asset. For example, furniture acquired at `1,30,000 has its useful life estimated to be 10
years and its estimated scrap value is `10,000.
Depreciation per annum = 1,30,000–10,000/10 years
= `12,000
 Estimated useful life: Every asset has its useful life other than its physical life (in terms of number of
years, units) used by a business. The asset may exist physically but may not be able to produce the
goods at a reasonable cost. For example, an asset is likely to lose its useful value within 15 years; its
useful life i.e. life for purpose of accounting should be considered as only 15years.

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Methods of Recording Depreciation

In the books of account, following are the two methods of recording depreciation of fixed assets:
 When depreciation is charged or credited to the assets account
 When depreciation is credited to provision for depreciation/accumulated account

When Depreciation is Charged or Credited to the Assets Account

In this method, depreciation is deducted from the asset value and charged (debited) to profit and loss
account. Hence, the asset value is reduced by the amount of depreciation.

Journal entries for recording under this method are as follows:

Journal
Purchase of an asset
Date Particulars L.F. Dr. Cr.
` `
2016
1 Jan Asset A/c Dr.
------To Cash/Bank A/c
(Being the asset purchased and the cost of an
asset including installation expenses and
freight)
Following entries are recorded at the end of each year
31 Dec Depreciation A/c Dr.
------To Asset A/c
(Being the amount of depreciation charged)
31 Dec Profit and Loss A/c Dr.
------To Depreciation A/c
(Being the depreciation amount transferred to
profit and loss account)

In the balance sheet, asset appears at its written down value which is cost less depreciation charged till
date. In this method, the original cost of an asset and the total amount of depreciation which has been
charged cannot be ascertained from this balance sheet.

Profit and Loss Account

Dr. Cr.
Date Particulars J.F. ` Date Particulars J.F. `
31 Dec To Depreciation A/c 31 Dec By Gross Profit A/c
31 Dec To Net Profit A/c

Date Liabilities ` Date Assets `

Asset
Less: Depreciation

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

When Depreciation is Credited to Provision for Depreciation Account

In this method, depreciation is credited to the provision for depreciation account or accumulated
depreciation account every year. Depreciation is accumulated in a separate account instead of adjusting
into the asset account at the end of each accounting period. In the balance sheet, the asset will continue
to appear at the original cost every year. Thus, the balance sheet shows the original cost of the asset and
the total amount of depreciation charged on asset.

Journal entries for recording under this method are as follows:

Journal
Purchase of an asset
Date Particulars L.F. Dr. Cr.
` `
2016
1 Jan Asset A/c Dr.
------To Cash/Bank/Vendor A/c
(Being the asset purchased and the cost of an
asset including installation expenses and
freight)
Following entries are recorded at the end of each year
31 Dec Depreciation A/c Dr.
------To Provision for Depreciation A/c
(Being the amount of depreciation charged)
31 Dec Profit and Loss A/c Dr.
------To Depreciation A/c
(Being the depreciation amount transferred to
profit and loss account)

Profit and Loss Account

Dr. Cr.
Date Particulars J.F. ` Date Particulars J.F. `
31 Dec To Provision 31 Dec
Depreciation A/c

Liabilities ` Assets `
Asset
Less: Provision for Depreciation

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Depreciation Account and Provision for Depreciation Account

Depreciation Account Provision for Depreciation Account

It is a nominal account It is a valuation account

It will always have debit balance It will always have credit balance

It is a temporary account It is a permanent account

It is opened when an asset is shown at its It is opened when an asset is shown at its original cost
written down value

It is charged against the assets account It is not charged against the assets account

It will appear in the profit and loss account but It will appear in the balance sheet but not in the profit
not in balance sheet and loss account

Methods of Depreciation

The two methods of depreciation are

 Fixed percentage on original cost or straight line method
 Fixed percentage on diminishing balance or written down value method

Straight Line Method

According to this method, a fixed and equal amount is charged as depreciation for every accounting
period during the life time of an asset. This method is based on the assumption of equal usage of time
over asset’s entire useful life. Hence, the amount of depreciation is same from period to period over the
life of the asset.

Depreciation amount can be calculated by using the following formula:

If the asset has a residual value at the end of its useful life, the amount to be written of every year is as
follows:
Depreciation = Cost of asset – Estimated net residual value / No. of years of expected life

If the annual depreciation amount is given then we can calculate the rate of depreciation as follows:
Rate of depreciation = Annual depreciation amount / Cost of asset * 100

Advantages of Straight Line Method

 Simple to calculate the depreciation amount
 Assets can be depreciated up to the estimated scrap value
 Easy to understand the amount of depreciation
 Every year, the same amount of depreciation is debited to profit and loss account, and hence the
effect on profit and loss account will remain the same.

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Disadvantages of Straight Line Method

 Interest on capital invested in assets is not provided in this method.
 Over the years, the work efficiency of assets decreases and repair expenses increases. Therefore,
there is burden on the profit and loss account.
 Book value of the assets becomes zero but still the assets are used in the business.

Illustration
Pokemon and Brothers purchased a Machinery for `3,00,000 on April 01,2014 and spent `40,000 for its
installation. The salvage value of the machine after its useful life for 5 years, is estimated to be `5,000.
Record journal entries for the year 2014-2015 and draw up Machine Account and Depreciation Account
for first 2 years given that the depreciation is charged using straight line method if the books of accounts
close on March 31 every year and the firm charges depreciation to the asset account.

Books of Pokemon and Brothers

Journal Entries
Date Particulars L.F. Debit Credit
` `
2014
Apr 1 Machinery A/c Dr. 3,00,000
-------To Bank A/c 3,00,000
(Being machinery purchased for `3,00,000)
2014
Apr 1 Machinery A/c Dr. 40,000
-------To Bank A/c 40,000
(Being expenses incurred on installation)
2015
Mar 31 Depreciation A/c Dr. 67,000
-------To Machinery A/c 67,000
(Being depreciation charged on assets)
2015
Mar 31 Profit and Loss A/c Dr. 67,000
-------To Depreciation A/c 67,000
(Being depreciation debited to profit and loss
account)
2016
Mar 31 Depreciation A/c Dr. 67,000
-------To Machinery A/c 67,000
(Being depreciation charged on assets)
2016
Mar 31 Profit and Loss A/c Dr. 67,000
-------To Depreciation A/c 67,000
(Being depreciation debited to profit and loss
account)

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Machinery Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2014 2015
Apr 1 To Bank A/c 3,00,000 Mar 31 By Depreciation A/c 67,000

Apr 1 To Bank A/c 40,000 Mar 31 By Balance c/d 2,73,000

3,40,000 3,40,000
2015 2016
Apr 1 To Balance b/d 2,73,000 Mar 31 By Depreciation A/c 67,000
Mar 31 By Balance c/d 2,06,000
2,73,000 2,73,000
2016
Apr 1 To Balance b/d 2,06,000

Depreciation Account
Dr. Cr.
Date Particulars J.F. Amount Date Particulars J.F. Amount
` `
2015 2015
Mar 31 To Machinery A/c 67,000 Mar 31 By Profit and Loss 67,000
A/c
67,000 67,000
2016 2016
Mar 31 To Machinery A/c 67,000 Mar 31 By Profit and Loss 67,000
A/c
67,000 67,000

Working Notes:
Original Cost of Machinery = `3,00,000 + `40,000 = `3,40,000
Salvage value = `5,000
Life of asset = 5 years

Depreciation per annum = `3,40,000 – `5,000/5

= `67,000

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Written Down Value Method

In this method depreciation is charged on the book value of the asset and the amount of depreciation
reduces year after year. It implies that a fixed rate on the written down value of the asset is charged as
depreciation every year over the expected useful life of the asset. The rate of depreciation is applicable to
the book value but not to the cost of asset.
Rate of depreciation can be ascertained on the basis of cost, scrap value and useful life of the asset as
follows:
𝑆
𝑅 = 1– 𝑛 = 100
𝐶
Where, R is the rate of depreciation in percent, n is the useful life of the asset; S is the scrap value at the
end of useful life and C is the cost of the asset.

Advantages of Written Down Value Method

 The profit and loss account of depreciation and repair expenses has same weightage throughout the
useful life of asset because depreciation decreases with an increase in repair expenses.
 Since the benefits from asset keep on decreasing, the cost of asset is allocated rationally.
 This method is most favorable for those assets which require increased repairs and maintenance
expenses over the years.
 This method is widely accepted under the Income Tax Act.

Disadvantages of Written Down Value Method

 The value of assets can never be zero even though it is discarded.
 In this method, it is difficult to calculate depreciation.
 There is no provision of interest on capital invested in use of assets.

Sale of an Asset
Sometimes an asset may be sold before the completion of its useful life because of obsolescence,
inadequacy or for any other reason. In this case, there may be gain on sale of asset if the sale proceeds
are greater than the written down value of the asset on the date of sale or loss on sale if the sale
proceeds is lesser than the written down value of the asset on the date of sale. Then these profit or loss
on sale of asset is transferred to profit and loss account.

Profit on Sale: Sale proceeds > Written Down Value of the Asset
Loss on Sale: Sale proceeds < Written Down Value of the Asset

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Accounting entries for recording the sale of an asset are as follows:

Journal
Date Particulars L.F. Dr. Cr.
` `
On the date of sale of an asset
2016
Cash / Bank A/c Dr.
------To Asset A/c
(Being an Asset sold)
Provision for depreciation account is transferred to the Asset Account as it is no longer required to be
taken forward.* ------
Provision for Depreciation A/c Dr.
------To Asset A/c
(Being the provision for depreciation
transferred to Asset Account)
In case of profit on sale
Asset A/c Dr.
------To Profit and Loss A/c
(Being profit on sale of an asset transferred to
Profit And Loss Account)
In case of loss on sale
Profit and Loss A/c Dr.
------To Asset A/c
(Being loss on sale of an asset transferred to
Profit And Loss Account)
*Note: Only when the provision for depreciation account is maintained, entry will be passed.

Disposal of an Asset
A new account is opened named Asset Disposal A/c at the time of sale of an asset. This account is
opened in the ledger to calculate profit or loss on sale of an asset.

Following journal entries required for preparation of Asset Disposal A/c

A. When provision for depreciation account is maintained

Journal
Date Particulars L.F. Dr. Cr.
` `
Gross value of the asset being sold is transferred to the Asset Disposal Account
2016
Asset Disposal A/c Dr.
------To Asset A/c
(Being the asset sold at original cost)
Amount of accumulated depreciation is transferred to the Asset Disposal Account
Provision for Depreciation A/c Dr.
------To Asset Disposal A/c
(Being the accumulated depreciation
transferred to Asset Disposal Account)
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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Amount of sale proceeds

Cash / Bank A/c Dr.
------To Asset Disposal A/c
(Being the sale value of the asset sold)
In case of Profit on Sale
Asset Disposal A/c Dr.
------To Profit and Loss A/c
(Being profit on sale of an asset transferred to
Profit And Loss Account)
In case of Loss on Sale
Profit and Loss A/c Dr.
------To Asset Disposal A/c
(Being loss on sale of an asset transferred to
Profit And Loss Account)

B. When provision for depreciation account is not maintained

Journal
Date Particulars L.F. Dr. Cr.
` `
Gross value of the asset being sold is transferred to the Asset Disposal Account
2016
Asset Disposal A/c Dr.
------To Asset A/c
(Being the asset sold at original cost)
Amount of accumulated depreciation is transferred to the Asset Disposal Account
Depreciation A/c Dr.
------To Asset Disposal A/c
(Being the depreciation transferred to Asset
Disposal Account)
Amount of sale proceeds
Cash / Bank A/c Dr.
------To Asset Disposal A/c
(Being the sale value of the asset sold)
In case of Profit on Sale
Asset Disposal A/c Dr.
------To Profit and Loss A/c
(Being profit on sale of an asset transferred to
Profit And Loss Account)
In case of Loss on Sale
Profit and Loss A/c Dr.
------To Asset Disposal A/c
(Being loss on sale of an asset transferred to
Profit And Loss Account)

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Difference between Straight Line and Written Down Value Method

Straight Line Method Written Down Value Method

Depreciation is calculated on the original cost Depreciation is calculated on the book value (i.e.
of fixed asset original cost less depreciation) of fixed asset

Amount of depreciation remains constant for Amount of depreciation keeps on decreasing year after
all years year
At the end of the useful life of an asset, the At the end of the useful life of an asset, the balance in
balance in the asset account will reduce to the asset account will not reduce to zero
zero
It is not accepted by Income Tax Law It is accepted by Income Tax Law
It is suitable for assets which get completely It is suitable for assets which require more and more
depreciated on the account of expiry of its repairs in the later stage of its useful life
useful life
Rate of depreciation is easy to calculate Rate of depreciation is difficult to calculate

Illustration
On January 01, 2013, Vighneshwar Travels, purchased 2 Buses for `25,00,000 each. On July 01, 2016,
one of the bus which was purchased on January 01, 2013 was sold for `9,50,000. Prepare Bus account
and Provision for Depreciation account from the year 2013 to 2016, if depreciation is written off @10% p.a.
on diminishing balance method. Books are closed on December 31 every year.

Books of Vighneshwar Travels

Bus Account
Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
` `
2013 2013
Jan 01 To Bank A/c 50,00,000 Dec 31 By Balance c/d 50,00,000
50,00,000 50,00,000
2014 2014
Jan 01 To Balance b/d 50,00,000 Dec 31 By Balance c/d 50,00,000
50,00,000 50,00,000
2015 2015
Jan 01 To Balance b/d 50,00,000 Dec 31 By Balance c/d 50,00,000
50,00,000 50,00,000
2016 2016
By Provision for
Jan 01 To Balance b/d 50,00,000 Jul 01 7,68,625
depreciation A/c (Bus 1)
Jul 01 By Bank A/c (Sale) 9,50,000
By Profit and Loss A/c
Jul 01 7,81,375
(Loss)
Dec 31 By Balance c/d 25,00,000
50,00,000 50,00,000

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Provision for Depreciation Account

Dr. Cr.
Amount Amount
Date Particulars J.F. Date Particulars J.F.
` `
2013 2013
Dec 31 To Balance c/d 5,00,000 Dec 31 By Depreciation A/c 5,00,000
5,00,000 5,00,000
2014 2014
Jan 01 By Balance b/d 5,00,000
Dec 31 To Balance c/d 9,50,000 Dec 31 By Depreciation A/c 4,50,000
9,50,000 9,50,000
2015 2015
Jan 01 By Balance b/d 9,50,000
Dec 31 To Balance c/d 13,55,000 Dec 31 By Depreciation A/c 4,05,000
13,55,000 13,55,000
2016 2016
Jul 01 To Bus A/c 7,68,625 Jan 01 By Balance b/d 13,55,000
Jul 01 By Depreciation A/c 91,125
Dec 31 To Balance c/d 8,59,750 Dec 31 By Depreciation A/c 1,82,250
16,28,375 16,28,375

Working Notes:

Years Opening – Depreciation = Closing

Balance Balance
2013 25,00,000 – 2,50,000 = 22,50,000
2014 22,50,000 – 2,25,000 = 20,25,000
2015 20,25,000 – 2,02,500 = 18,22,500
2016 18,22,500 – 91,125 (6 month) = 17,31,375
Accumulated Depreciation = 7,68,625

WDV as on July 01, 2016 17,31,375

Less: Sale on July 01, 2016 9,50,000
Loss on sale 7,81,375

Provision and its Importance

Provision is an amount which is set aside by charging it to profit for the purpose of providing for any
known liability or uncertain loss or expense. The amount of which cannot be determined with certainty is
also referred to as provision. Few examples are provision for depreciation, provision for doubtful debts
and provision for discount on bad debtors.

The main objective of provision is to account all expenses and losses. Through the creation of provision
account, the amount of liability, losses and expenses are estimated and accounted for the accounting

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

period. Therefore, the true profit and loss is ascertained, liabilities and assets are presented with correct
values.

Features
 It is an amount kept aside, out of income or profit, to meet the known liability
 It is retention of profit made for the time being and specific reason such as known depletion in the
value of the asset, anticipated loss occurred but the amount is not ascertained and a liability has been
known to have arisen
 At the time accounting, an appropriate amount of anticipated loss in the value of the asset or the
liability is not ascertained
 It is a charge to profit and loss account

Importance of Provision
 To meet anticipated losses and liabilities: Provision is created to meet the anticipated losses and
liabilities such as provision for doubtful debts, provision for discount on debtors and provision for
taxation.
 To meet known losses and liabilities: Provision is created to meet known losses and liabilities such
as provision for repairs and renewals.
 To present correct financial statements: To present a true and fair view of profit and financial
statement, the business must maintain provision for known liabilities and losses.

Therefore, provision is necessarily to be created to ascertain the current income or profit. Also, it is
considered as a charge against revenue or profits.

Accounting Treatment
Provision is a charge against the profit which is debited in the profit and loss account. In the balance
sheet, the amount of provision may be shown on the asset side by deducting from the relevant asset or on
the liability side along with the current liabilities.
 Treatment on asset side– Provision for doubtful debts is deducted from the amount of sundry debtors
and the provision for depreciation is deducted from the relevant asset.
 Treatment on liability side– Provision for repairs and charges are shown along with the current
liabilities.

Reserves and its Importance

Reserves
Reserve is an amount set aside from the profit other than surplus which is retained by the business to
meet future contingencies. It is an appropriation of profit and not a charge against profit, and therefore is
shown in the profit and loss appropriation account.

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Types of Reserves

Reserves

Revenue Reserve Capital Reserve

General Reserve Specific Reserve

 Revenue Reserve: It is an amount set aside out of revenue profits for distribution of dividends. For
example, general reserve, investment fluctuation fund, capital reserve and workmen compensation
fund. It is not a charge against profit but it is appropriation of profit shown in the profit and loss
account. It is beneficial for the smooth function of the business. The retention of profit in the form of
reserves reduces the amount of profit to distribute among the business owners. This is further
classified in to general reserve and specific reserve.
o General reserve means a reserve which is not maintained for specific purpose. It helps to
strengthen the financial status of the business. It is also known as free reserve and contingency
reserve.
o Specific reserve means a reserve which is maintained for specific purpose. For example, dividend
equalisation reserve is created to maintain dividend rate. This reserve amount is utilised to
maintain the rate dividend in the year of low profit. Likewise, the workmen compensation fund is
maintained to provide claims of the workers, investment fluctuation fund is used at times of decline
in the value of investment and debenture redemption reserve is used to provide funds for
redemption of debentures.

 Capital Reserve: It is an amount set aside out of capital profits which is not available for distribution
as dividend among the shareholders. It is used for writing capital losses/issue of bonus share in a
company. Examples of capital reserves are
o Profit prior to incorporation
o Premium on issue of shares or debentures
o Profit on redemption of debenture
o Profit on forfeiture of share
o Profit on sale of fixed assets
o Capital redemption reserve
o Profit on revaluation of fixed assets and liabilities

Importance of Reserves
 It strengthens the financial position of an enterprise
 It helps meet the purpose of future contingency
 It assists the expansion of business operation or to bring consistency in distribution of dividend.
 It creates reserves for investment allowance reserve

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Accounting Treatment
Reserves are not a charge against profit but are the appropriation of profits. Therefore, reserves are
transferred to the debit side of profit and loss appropriation account. In the balance sheet, it is shown on
the liability side under the heads of reserves and surplus.

Provisions and Reserves

Basis Provision Reserve
Basic Nature It is a charge against profit It is an appropriation of profit
Purpose It is created to meet specific It is made for strengthening the
liabilities or contingencies financial position of the business.
Some reserves are also
mandatory under law.
Accounting Treatment It is recorded on the debit side of It is recorded on the debit side of
profit and loss account the profit and loss appropriation
account
Presentation in Balance Sheet It can be shown either by way of It is shown on the liabilities side
deduction from the item on the after capital
assets side for which it is
created or
in the liabilities side along with
the current liabilities
Utilisation for Dividend It cannot be utilised for dividend It can be utilised for dividend
distribution distribution
Investment Outside the It is never invested outside the It can be invested outside the
Business business business
Effects It reduces net profits It reduces only divisible profit

Specific Reserve and General Reserve

Basis Specific Reserve General Reserve
Purpose It is created for specific purposes It is not created for specific
purposes
Available for It is not available for any future It is available for any future
contingencies or expansion of business. contingencies or expansion of
It is utilised only for that purpose for business. It strengthens the
which it is created. financial position.
Examples Dividend equalisation reserve, debenture Contingency reserve and general
redemption reserve and development reserve
rebate reserves

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ACCOUNTANCY DEPRECIATION, PROVISION AND RESERVES

Revenue Reserve and Capital Reserve

Basis Revenue Reserve Capital Reserve
Source It is created out of business profits It is created out of capital profits

Available for It is available for distribution of dividends It is available for distribution of

without any precondition dividends only if the company fulfills
certain conditions as per the
Companies Act
Purpose It is for strengthening the financial It is for meeting capital losses or for
position and for some specific purposes a specific purpose of Company Act

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