2023 · Q64
Which one of the following statements is correct?
General Accounting Principles, Auditing and InsuranceFinal accounts
- ACapital reserves Capital reserves are normally created out of free or distributable profits.
- BDividend equalization reserve is an example of general reserve.
- CGeneral reserve can be used only for some specific purposes.
- DProvision' is a charge against profit.
Explanation
A provision is a charge against profit: it is debited to the Profit and Loss Account before profits are determined and is made irrespective of profits, unlike reserves which are appropriations of profit. Option A is wrong because capital reserves arise from capital profits such as share premium, not from free or distributable profits. Hence D.