asked Aug 22, 2014 in Partnership-Dissolution of a Partnership Firm by deepz (143 points) 10,160 views

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Let us understand the fundamentals difference between a Provision, Reserve and Fund.
Provision: It is that amount of profit which is kept aside to meet some known expense or liability, it is created by debiting P & L A/c. For example Provision for Bad Debts is created to write off bad debts. So when bad debts happen, they are debited to Provision for Bad Debts A/c and not to Profit & Loss A/c. In the Balance Sheet also we show net debtors after deducting Provision for Bad debts from Debtors. I hope now you understand that we don't have to pay this provision to anyone. This is the amount of profit kept aside to meet bad debts.
Reserves: Reserves are created for some specific purposes like buying some assets (JLP and machinery), paying off some debts or some other specific reasons. This is an appropriation of profit (setting aside of profit so that the amount is not withdrawn as drawings or distributed as dividend). They are created by debiting P & L Appropriation A/c or Retained Earnings A/c. Note the difference Provisions are created by debiting P & L A/c, that amount is treated as an expense. So when you pay premium for JLP and you don't want to treat that as an expense, you create a JLP reserve by debiting P & l Appropriation A/c. At the time of surrender of JLP, JLP reserve is debited and JLP A/c is credited. So now you know you don't have to pay JLP reserve to anyone because it represents the amount of profit earned by you in past.
Funds: When amount set aside as a reserve is invested in outside securities, it is called a Fund. For example you want to replace machinery after 10 years, every year you create a reserve equal to depreciation charged and invest that amount in outside securities, it will be called Depreciation Reserve Fund. After 10 years you will sell these securities and from the money received you will buy machinery. So now I hope you know why you don't have to pay this amount to anyone. Similar is the case with Investment Fluctuation Fund. Such a fund is created by debiting P & L Appropriation A/c to set off the decline in the value of an Investment. If the market value of an investment becomes lower than it's purchase price, that difference is met out of IFF. So now you know that this fund is also not to be paid to anyone.
At the time of dissolution wherever there is any provision, reserve or fund, it is transferred to the Credit side of Realisation A/c and the corresponding assets on the debit side of Realisation A/c.
Contingency Reserve: This reserve is also created out of P & l Appropriation A/c and if there is no contingent liability to be paid, this reserve is credited to partners' accounts in their profit sharing ratio. In case there is any liability against contingency reserve, then this reserve is transferred to the credit side of Realistion A/c and liabilities are paid through Realisation A/c.

answered Aug 23, 2014 by jbsclasses (3,971 points)