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Wednesday, 16 November 2011

Write a note on the following, 1. Contingent liability 2. Contingent assets 3. Provision 4. General reserves 5. Revenue reserve 6. Capital Reserve

It is a liability which is not a natural liability but happening of an uncertain event it may become an actual liability. it may be due to past dealings or action obligation when contingent liability becomes actual liability, it may involve the company in loss. In case of loss it is necessary that an adequate reserves should be kept for it.

Example :-
1. Bill discounted but not matured.

2. Claims against the company the not acknowledged as debt.

3. A guarantee given by the company on behalf of others.

4. Arrears of dividends on cumulative preference shares.

5. In called amount on shares in other companies.

Verification :-
1. Auditor should see that such unknown and known liabilities are brought into account on the date of the balance sheet.

2. Auditor should see that such liabilities are shown on the balance sheet by way of foot notes.

3. Auditor should obtain a certificate from the responsible officer that such all liabilities are brought into account on the date of balance sheet.

4. He should also check that sufficient reserve has been allocated for such liability which is likely to result in a loss being sustained.

Those assets which comes into existence on happening of a certain events are called contingent assets. Assets is conditional with the asset can not be available.

The term provision means :
1. Any amount written off or retained by way of providing for any unknown liability.

2. The amount of which can not be find out with substantial accuracy.

3. The amount retained by way of providing for depreciation renewals, or diminution in the value of assets.

Example :-
i. Provision of taxation.
ii. Provision for depreciation etc.

Amount set a side out of the profits and others surpluses retained in the business to increase the working capital and to improve the financial position of the business. Such type of reserve may be considered as the "Undistributed Profit."
The general reserve may be created only in case of profit. It is usually treated as revenue reserve.

It represent all amounts set a side which are regarded by the directors as being free for distribution through the profit and loss appropriation account.

Example :-
i. Development Reserve.
ii. Investment Reserve.
iii. General Reserve etc.

The reserve capital denotes the uncalled capital which the shareholders can not be called upon to pay unless the company goes into liquidation capital reserve represent capital items are not free for distribution.


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