ACCOUNTANCY FORM FIVE TOPIC 3: RESERVES AND PROVISIONS

 INTRODUCTION

Any business firm must have an asset in conducting its activities.

Assets are the possessions of the business.

They are things of value that the firm utilizes in conducting business

They are the actual resources that are in the business.

Assets include land, building, machinery, stock of goods, and debtors cash.

Assets are financed by capital and liabilities or in technical terms are financed by equities.

DEFINITION OF RESERVE:

It is an amount set aside out of profits (i.e. from the profit and loss account or any surpluses for unidentified or Unspecified purposes.

KIND OF RESERVES:

Reserved can be classified into the following major categories.

1.  Revenue reserve
2.  Capital reserve

1. REVENUE RESERVE

Is a fund / amount created by voluntary transferring part of the profit kind normally becomes part of the name of that reserve.

TYPES OF REVENUE RESERVE

i. Specific reserves: These reserves created out of revenues profit for a specific purpose.

 ii. General reserve: These are reserves created out of revenue profit for
general purposes.

2. CAPITAL RESERVES.

These are reserves which are created out of the capital profits. These  reserves are not available for distribution among shareholders as dividend in the case of companies.

Examples or sources of capital reserve:

1. Profit on sale of fixed assets: it should be noted that capital profit is only excess of sale price over the cost of fixed asset.

2. Profit prior to incorporation.

3. Premium on issue of shares of debentures.

4. Profits on redemption of debentures

5. Profit on for feature of shares.

6. Surplus on revaluation of fixed assets

7. Amount transferred out of profits to capital.

PROVISION

Provision usually means any amount written off or retained by way of providing
depreciation, renewals or diminution in the value of asset or retained by way of
providing for any known liability of which the amount cannot be determined with substantial accuracy.

Difference between reserve and provision

1. A reserve is an appropriation of profit while a provision is a charge against profits .in other words true profits cannot be determined without making adjustment for the provisions required.

2. Creation of reserves increases proprietor’s funds while creation of provisions decreases his funds in the business.

3. Provisions are created to meet some known contingency, the amount of which cannot be precisely determined .Reserves are created to meet some financial position of the business, while creation of previsions help in maintaining the exiting financial position.

PROVISION FOR BAD AND DOUBTFUL DEBTS.

Bad debts:

1. Accounting entries on bad debts.

Dr; bad debts a/c

Cr; debtors a/c

Then at the end of accounting period.

Dr: P&L

Cr: bad debts

2. Discount allowed

Dr: P&L

CR: Provision for discount allowed.

3. Treatment on provision for B.D D

i.In the first year:

Dr: P&L

Cr: provision for B. D.D

ii. Decrease in provision for B.D.D

Dr .Provision for B.D.D Cr: P&L

iii. Increase in provision

Dr: P&L
CR: Provision for B.D.D

 EXAMPLE

List of debtors.

YEAR	DEBTORS
20082009 2010 2012	100,000150,000 145,000 140,000

Rate of provision for B.D.D is 10% P.A

Draw Up:

1. provision for B.D.D A/C

2. balance sheet as at 31. 12. 2000 – 2011

2008: 100,000 x   10/100 = 10,000

2009: 150,000 x 10/100 =   15,000

2010: 145,000 x 10/100 = 14,500

2011: 140,000 x 10/100   = 14,000

DR   PROVISION FOR BAD AND DOUBTFUL DEBTS A/C CR

31.12.2008	Balance c/d	10,000	31.12.2008	P & L	10,000
31.12.2009	Balance c/d	15,000	1.1.2009	Balance b/d	10,000
			31.12.2009	P & L	5,000
		15,000			15,000
31.12.2010	P & L	500	1.1.2010	Balance b/d	15,000
31.12.2010	Balance c/d	14,500
		15,000			15,000
31.12.2011	P & L	500	1.1.2011	Balance b/d	14,500
31.12.2011	Balance c/d	14,000
		14,500			14,500
		1.1.2012		Balance b/d	14,000

BALANCE     SHEET     AS     AT       31.12.2008

	2008	Debtors	100,000
		less: Provision for B.B.D	10,000	90,000
	2009	Debtors	150,000
		less: Provision for B.B.D	15,000	135,000
	2010	Debtors	145,000
		less: Provision for B.B.D	14,500	130,500
	2011	Debtors	140,000
		less: Provision for B.B.D	14,000	126,000

BAD DEBTS RECOVERED.

• when bad debts recorded

Dr: cash / bank

Cr: bad debt recoverable a/c

Then at the end of accounting period:

Dr: bad debts recoverable a/c

Cr: P & L

QUESTIONS:

1. A business makes a provision for bad debts and discount allowed at a rate of 6% and 3% of debtors respectively

The debtors balance as at 31^st December were;

1995               85,000

1996               75,000

1997               90,000

You are required to show the necessary entries in the provision accounts, profit and loss account and balance sheets for those years.

1. A trader makes a provision for discounts received at the rate of 4% of creditors at the end of the year. The creditors balance as at 31^st December were.

19 -2               12,000

19-3                15,000

19-4                10,000

19-5                13,000

You are required to show the necessary entries in the provision for discount received account, profit and loss account and balance sheet as at for these gears.

3. The following items appear in A white trial balance dated 31^st December 19-7

		DR	CR
		Tsh	Tsh
Bad debts		3,000
Discount allowed		1,420
Discount received			3,000
Trade debtors		70,000
Trade creditors			110,000

It is white’s policy to keep the provision for bad debts. Discount allowed and discount received at the rate of 5%, 2.5% and 6% on debtors.

You are required to show the entries in:-
1.The P & L account (extract) for the year ended 31 .12. 19-9
2. Balance sheet (extract) as at 31. 12. 19-9

CALCULATION (1)

Provision for bad debts at a rate of 6%

1995:   85,000 x 6/100 = 5,100

1996:   75,000 x 6/100 = 4500

1997:   90,000 x 6/100 = 5400

DR  PROVISION FOR BAD AND DOUBTFUL DEBTS   A/C   CR

31.12.1995	Balance c/d	5100	31.12.195	p&L	5100
31.12.1996	p&l	600	1.1.1996	balance b/d	5100
31.12.1996	Balance c/d	4500
		5100			5100
			1.1.1997	balance b/d	4500
31.12.1997	Balance c/d	5400		p&l	900
		5400			5400
			1.1.1998	balance b/d	5400

DR   PROFIT AND LOSS A/C    CR

31.12.1995	provision for B.D.Debts	5100	31.12.1996	provision for B.D.Debts	600
31.12.1997	provision for B.D.Debts	900

4. E.C Commenced business on 1^st January 1997 and his account end to 31  December, every year. For the ended 31. 12. 1997, bad debts written off amounted to 1200/=, if was also found necessary to create the provision for doubt of 2,000/= in 1998, debts, amounting to 1600, proved bad and were w/o.

Mrs Lema, whose debts of 350 was w/o as bad in 1997 settled her account in full on 30.11.1998. As at 31.12.1998 total debts outstanding were 56,000 it was decided to bring  provision up to 5% on this figure of that date.

In 1999, 2,350 debts were w/o during the year, and another recovery of 150 was made in respect of debts w/o in 1997. As 31^st .12.1999, total debts outstanding were 42 rel="nofollow noopener" target="_blank">,000; the provision for doubtful debt is to be maintained at 5% of this figure.

You are required to prepare:-

1. Bad debts a/c.
2. Provision for bad debts a/c.
3. Bad debts recovery a/c.

CALCULATION (4)

DR  BAD DEBTS A/C    CR

31.12.1997	Debtors	1200	31.12.1997	p&l	1200
31.12.1998	Debtors	1600	31.12.1998	p&l	1600
31.12.1999	Debtors	2350	31.12.1999	p&l	2350

DR     PROVISION FOR BAD AND DOUBTFUL DEBTS   A/C                                 CR

31.12.1997	Balance c/d	2,000	31.12.1997	p&l	2,000
31.12.1998	Balance c/d	2,800	1.1.1998	balance b/d	2,000
			31.12.1998	p&l	800
		2,800			2,800
31.12.1999	p&l	700	1.1.1999	balance b/d	2,800
31.12.2000	Balance c/d	2,100
		2,800			2,800
			1.1.2000	balance b/d	2,100

Workings:

31.12.1998: 56000 X 5/100 = 2800

31.12.1999: 42000 X 5/100 = 2100

DR  BAD   BEBTS   RECOVERY   A/C   CR

31.12.1998	p&l	350	31.12.1998	cash/bank	350
31.12.1999	p&l	150	31.12.1999	cash/bank	150

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