Extraction of Provision for Reserve Fund Journal Entries

Provision for Reserve Fund is a financial arrangement made by entities to set aside a portion of their profits or income to build up a reserve for future use. The reserve fund is typically created to meet unexpected expenses, potential contingencies, or to support long-term financial stability.

The journal entries related to the extraction of provision for reserve fund generally involve two accounts - Reserve Fund and Profit and Loss Appropriation. The following is an example of how these entries can be recorded:

1. When the provision for reserve fund is initially created:

Debit: Profit and Loss Appropriation

Credit: Reserve Fund

2. When the provision for reserve fund is increased:

Debit: Profit and Loss Appropriation

Credit: Reserve Fund

3. When the provision for reserve fund is utilized:

Debit: Reserve Fund

Credit: Cash/Bank (or relevant expense account)

4. When the provision for reserve fund is reversed:

Debit: Reserve Fund

Credit: Profit and Loss Appropriation

It is important to note that the specific accounts used in the journal entries may vary depending on the accounting policies and practices followed by different entities.

For example, Company XYZ sets aside 10% of its annual profits as provision for reserve fund. In the year 2021, the company made a profit of $100,000. Here is how the journal entry for the creation of the provision would look:

Debit: Profit and Loss Appropriation - $10,000

Credit: Reserve Fund - $10,000

Similarly, if the company decides to increase the provision by an additional $5,000, the journal entry would be:

Debit: Profit and Loss Appropriation - $5,000

Credit: Reserve Fund - $5,000

These journal entries help in accurately recording the creation, increase, utilization, and reversal of the provision for reserve fund, providing transparency and clarity in the financial statements of the entity.

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