Question

Explain the purpose of creating provisions.

Answer 1

Reserves may be created for any of the following purposes:

(i) Meaning unforeseen contingency or liability.

(ii) Redemption of liabilities such as redemption of debentures etc.

(iii)Providing additional working capital and thus strengthening the financial position of the business.

(iv) Utilizing internal funds for expansion of a business.

(v) Equalising the rates of dividends.