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Financial Accounting

Notes Any such use of general reserve has to be stated in some way in the balance sheet. A
number of provisions have been included in the companies Act for the regulation, creation
and utilization of general reserve. This underlines the importance attached to it in the
functioning of corporate enterprises. A word of caution about the commonly perceived
role of general reserve is necessary. General reserve is widely regarded as a means of
strengthening the overall financial position of the business entity. However, this depends
upon the proper valuation of the assets and liabilities of the business. In case assets and
liabilities are properly valued, the balance on general reserve is indicative of the financial
health of an enterprise but it is not so in the absence of this vital condition.
 Specific Reserves: A business undertaking in contemporary times is involved in a range of
business activities in pursuance of its goal of creating value of the organization. Some of
the of contingency situations can be looked after and financially managed by the creation
of provisions for known or expected contingencies. Management may as well like to
provide a second line of deface against some of these contingencies as a measure of
abundant caution. A specific reserve is created for a given purpose. It cannot be used for
any other purpose except for which they are created. There can possibly be any number of
reserves in business, every one of them characterized by some peculiar feature dictated by
the specific purpose which they are meant to serve. However, there is an undercurrent of
common characteristics shared by them.

 They are sharply focused from the viewpoint of their use because they are built up
for some specific purpose or the other.

 A businesslike approach to the management of these reserves may require that their
balances be invested outside the business.
 All specific reserves are presented on the liabilities side of the balance sheet, as they
are credit balances.
When any specific reserve is utilized, the amount drawn upon is debited to the account of
the reserve concerned. The reserves are credited at the time of the preparation of financial
statements by allocations decided to be made to them by management and the
corresponding credit is given to profit and loss appropriation account.

Self Assessment

State true and false:
16. Depreciation cannot be provided increase of loss, in a financial year.
17. Under written down value method, depreciation is charged on the original cost of the
asset.
18. Provision is the charges against profits for all apprehended losses.
19. Capital reserves are freely distributed as profits.
20. All reserves appear on the liability side of the balance sheet.

10.5 Statements of Accounting Standards (AS 6) Revised – Depreciation
Accounting

The following is the text of the revised Accounting Standard (AS) 6, ‘Depreciation Accounting’,
issued by the Council of the Institute of Chartered Accountants of India.

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