Assertion (A): Transfer to reserves is shown in the Profit and Loss Appropriation A/c. Reason (R): Reserves are charge against the profits. In the context of the above two statements, which of the following is correct?

Question

KollegeApply · Accepted Answer

(A) is correct, but (R) is wrong. Explanation: Transfer to reserves is indeed shown in the Profit and Loss Appropriation Account, so Assertion (A) is correct. However, Reason (R) is incorrect because reserves are not a charge against profits but rather an appropriation of profit. Charges (like interest on a loan) are deducted before calculating net profit, whereas reserves are created after net profit is determined, from the distributable profit. Therefore, the assertion is right, but the reason is wrong.

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