Question

Creation of reserves ______ the amount of profits available for distribution among the owners of the business.

• A. Neutralize
• B. Increase
• C. Reduces
• D. None of the above

Answer 1

Answer: (C)

Reduces

Reduces.

Reserves are the amounts set aside out of profits. It is an appropriation of profits or accumulated profits to strengthen the financial position of the business. Reserves are not set aside to meet a liability or depreciation in the value of assets but is set aside to meet known or unknown contingency that may arise in future. For e.g., General Reserve, Reserve for Expansion etc.

it is created as a matter of prudence out of profits and hence creation of reserves reduces the amount of profits available for distribution among the owners of the business.