Question

Creation of Reserve is:

• A. Illegal
• B. Necessary
• C. Not necessary
• D. Useless

Answer 1

Answer:

C. Not necessary

Reserves are created out of profits for future use. They are not a legal requirement, unlike provisions which are for known liabilities. Examples: General Reserve – for general purposes Specific Reserve – for a specific purpose, e.g., dividend equalisation Purpose: Strengthens financial position, but creation is optional, hence “not necessary.”