State with reasons whether the following statements are True or False;
Making excessive provision for doubtful debits builds up the secret reserve in the business.
True. When excessive provision for doubtful debts is created, it reduces the net profit more than necessary, thereby building up a secret reserve in the business.
Capital reserves are normally created out of free or distributable profits.
False. Capital reserves are not normally created out of free or distributable profits. They are typically created out of capital profits.
Dividend equalisation reserve is an example of general reserve.
False. Dividend equalisation reserve is an example of a specific reserve, not a general reserve, as it is created for a specific purpose.
General reserve can be used only for some specific purposes.
False. General reserve is not used only for specific purposes. It can be utilized for any future contingency or to strengthen the financial position.
'Provision' is a charge against profit.
True. A provision is a charge against profit and is debited to the Profit and Loss Account.
Reserves are created to meet future expenses or losses the amount of which is not certain.
False. Reserves are created to strengthen the financial position of the business, whereas provisions are created for known liabilities where the amount is uncertain.
Creation of reserve reduces taxable profits of the business.
False. Creation of a reserve is an appropriation of profit, not a charge, so it does not reduce the taxable profits of the business.
Explanation
The answers are derived directly from the textbook context provided. The context explicitly states that a provision is a 'charge against profit' created for a 'known current liability the amount of which is uncertain', while a reserve is an 'appropriation of profit' created to 'strengthen the financial position'. This distinction clarifies that reserves are not for uncertain expenses (provisions are) and that reserves, being appropriations, do not reduce taxable profit. The context also lists 'Dividend equalisation reserve' under specific reserves (implied by the fill-in-the-blank answer) and links secret reserves to excessive depreciation/provisions. Capital reserves are defined separately from revenue reserves (which come from normal profits).