AccountsISC Class 11 · Provisions and Reserves

Types of Reserves: General, Specific, Capital and Secret (ISC Class 11 Accounts)

Updated 17 October 2026 · Fact-checked

A reserve is a part of profit set aside after the profit is found, to meet future needs or strengthen the business. Revenue reserves come from revenue profits and are general (no specific purpose) or specific (a named purpose such as dividend equalisation). Capital reserves come from capital profits and are not distributed as dividend. A secret reserve is hidden by undervaluing assets or overvaluing liabilities.

Understand Types of Reserves: General, Specific, Capital and Secret Reserves

Objectives. To strengthen the financial position, meet unexpected losses, provide for replacement of assets, equalise dividends, and maintain working capital.

Revenue reserves (created out of revenue profits by appropriation).

*General reserve:* no specific purpose; can be used for any business need. Entry: Profit and Loss Appropriation A/c Dr, To General Reserve A/c.
*Specific reserve:* for a stated purpose and used only for it: dividend equalisation reserve, workmen compensation reserve, investment fluctuation reserve, debenture redemption reserve.

Capital reserves (created from capital profits). Examples: profit on sale of fixed assets, profit on revaluation of assets, premium on issue of shares. They are not distributed as dividend (except as bonus shares under rules). Entry: for example, Profit on sale of asset (capital profit) is transferred to Capital Reserve.

Secret (hidden) reserve. Not shown in the balance sheet. Created by undervaluing assets (stock below cost, excess depreciation, fixed asset written off), overvaluing liabilities, or charging capital expenditure to revenue. Effects: profit shown is lower than true profit; assets are understated; the true financial position is hidden. Secret reserves are not permitted for companies under the Companies Act, because they distort the true financial position; some businesses historically used them to meet contingencies. Disadvantage: misleads owners, creditors and tax authorities.

Use of reserves. A specific reserve is used only for its stated purpose; a general reserve can be used for any purpose, such as absorbing losses or increasing working capital.

Balance sheet. Reserves appear on the liabilities side after capital. Provisions are different (deducted from assets).

Reserve and distribution. General reserve can be used to pay dividend in a bad year; capital reserve cannot.

Types of Reserves: General, Specific, Capital and Secret Reserves: key facts

Creation of reserve: Reserve = Percentage x Net profit | Appropriation after profit; For revenue reserves.
Capital profit: Capital profit = Sale price - Original cost of the asset (if positive) | Credited to Capital Reserve; any gain between book value and cost goes to Profit and Loss; Not distributable.
Hidden reserve: Secret reserve = True value of asset - Value shown | Profit understated by the same amount; When stock is undervalued.

How to answer Types of Reserves: General, Specific, Capital and Secret Reserves questions

Identify the type and show the entry and the balance sheet side.

1Decide whether the reserve is from revenue or capital profit.
2Compute the amount from the percentage or the capital profit.
3Pass the appropriation entry.
4Show the reserve on the liabilities side.

Types of Reserves: General, Specific, Capital and Secret Reserves in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

General reserve

Suppose a stationery shop earns a profit of Rs 80,000 and decides to keep 10% of it as general reserve for any future need.

What entry does it pass and how much remains?

Try it first, then show the solutionSolution

10% of 80,000 = 8,000.
Profit and Loss Appropriation A/c Dr 8,000, To General Reserve 8,000.

Answer: Rs 8,000 is transferred to General Reserve; Rs 72,000 remains for distribution.

Memory hook: Reserve is a slice of profit saved.

Tricks to remember Types of Reserves: General, Specific, Capital and Secret Reserves

Short memory aids. Say each one aloud once, then use it on a question the same day.

Revenue vs capital
Revenue reserve from trading profits; capital reserve from capital gains.
Use it when: Types.
Secret means hidden
Lower asset value shown means higher profit hidden.
Use it when: Secret reserve.
Specific has a name
Specific reserve carries a purpose in its name.
Use it when: Specific reserve.

Types of Reserves: General, Specific, Capital and Secret Reserves: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Reserve from capital profit · 1 mark · MCQBoard level

Profit on the sale of a fixed asset is credited to:
(a) general reserve (b) capital reserve (c) Profit and Loss (d) secret reserve

Try it first, then show the solutionSolution

It is a capital profit, retained as capital reserve.

Answer: (b) capital reserve

Example 2: Types · 3 marks · Short answerBoard level

Name and explain the two main kinds of revenue reserves with an example of each. (3 marks)

Try it first, then show the solutionSolution

General reserve: no specific purpose, any use.
Specific reserve: set for a named purpose, e.g., dividend equalisation reserve.

Answer: General reserve for any business use; specific reserve for a stated purpose such as dividend equalisation.

Example 3: Create reserves · 6 marks · Long answerHarder board level

Net profit Rs 1,20,000. The owner transfers 10% to general reserve and Rs 15,000 to a workmen compensation reserve. Land costing Rs 2,00,000 is sold for Rs 3,20,000. Pass entries and find the amount left in Profit and Loss Appropriation and the balance of capital reserve. (6 marks)

Try it first, then show the solutionSolution

General reserve = 12,000; specific reserve = 15,000; total 27,000. Entry: Profit and Loss Appropriation A/c Dr 27,000, To General Reserve A/c 12,000, To Workmen Compensation Reserve A/c 15,000.
Balance of profit = 1,20,000 - 27,000 = Rs 93,000.
Capital profit = 3,20,000 - 2,00,000 = Rs 1,20,000 credited to Capital Reserve. Entry: Profit on Sale of Land A/c Dr 1,20,000, To Capital Reserve A/c 1,20,000.

Answer: Entries: (1) Profit and Loss Appropriation A/c Dr 27,000, To General Reserve 12,000, To Workmen Compensation Reserve 15,000. (2) Profit on Sale of Land A/c Dr 1,20,000, To Capital Reserve 1,20,000. Profit left Rs 93,000; capital reserve Rs 1,20,000.

Example 4: Secret reserve · 5 marks · Long answerHarder board level

A trader values closing stock at Rs 40,000 though its cost is Rs 55,000, and reports a profit of Rs 90,000. Find the true profit and the secret reserve. State the effect next year if opening stock is valued correctly at Rs 55,000. (5 marks)

Try it first, then show the solutionSolution

True profit = 90,000 + 15,000 = Rs 1,05,000.
Secret reserve = 55,000 - 40,000 = Rs 15,000.
The opening stock is Rs 55,000 instead of Rs 40,000. Cost of goods sold increases by Rs 15,000, so next year's profit is Rs 15,000 lower than it would have been had the stock stayed at Rs 40,000. The hidden profit is thus released next year.

Answer: True profit Rs 1,05,000; secret reserve Rs 15,000; next year's profit is Rs 15,000 lower than it would have been had the opening stock stayed at Rs 40,000.

Example 5: Reserve or provision? · 5 marks · Long answerHOTS / competency

A firm has Rs 60,000 of profit. It sets aside Rs 8,000 for repairs it expects to incur in 2 years and Rs 12,000 as a general reserve. Show the correct treatment of each and the profit that appears in the Profit and Loss Account and the amount available for distribution. (5 marks)

Try it first, then show the solutionSolution

Repairs expected: a provision, charged before profit: profit = 60,000 - 8,000 = 52,000.
General reserve: appropriation from profit after charging provision: 12,000.
Available for distribution = 52,000 - 12,000 = Rs 40,000.

Answer: Profit after provision Rs 52,000; reserve Rs 12,000; Rs 40,000 available for distribution.

Where students lose marks in Types of Reserves: General, Specific, Capital and Secret Reserves

The slips examiners see most often, and what to write instead.

Mistake: Debiting a reserve to Profit and Loss as an expense
Confused with provision.
Wrong working
P&L Dr, To General Reserve
Right working
P&L Appropriation Dr, To General Reserve
Do this: Reserve is an appropriation.
Usually costs: 1-2 marks.
Mistake: Distributing a capital reserve as dividend
Looks like profit.
Wrong working
Capital profit paid out
Right working
Capital reserve retained
Do this: Capital profits are not distributed.
Usually costs: 1 mark.
Mistake: Computing true profit by deducting the hidden value
Wrong direction.
Wrong working
90,000 - 15,000
Right working
90,000 + 15,000
Do this: Understated stock means understated profit.
Usually costs: 2 marks.

Exam tips

Start with the source of the reserve: revenue or capital.
Give an example of each type.
Mention disadvantages of secret reserves.

Practice questions on Types of Reserves: General, Specific, Capital and Secret Reserves

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
A reserve created for a stated purpose such as dividend equalisation is a:
(a) general reserve (b) specific reserve (c) capital reserve (d) secret reserve
Hint
Has a purpose.
Answer
(b) specific reserve
Q2 · 3 marks · Short answerBoard level
Explain the term secret reserve and state two ways in which it can be created. (3 marks)
Hint
Hidden.
Answer
A secret reserve is a reserve not shown in the balance sheet. It is created by undervaluing assets (such as stock) and by overvaluing liabilities, or by treating capital expenditure as revenue.
Q3 · 6 marks · Long answerHarder board level
Net profit before the sale of the building is Rs 2,50,000, and the 15% is calculated on this figure. Transfer 15% to general reserve, Rs 20,000 to a specific reserve, and pay a dividend of Rs 1,00,000. A building bought at Rs 5,00,000 and shown at Rs 4,60,000 is sold for Rs 5,40,000. Find the profit carried forward and the capital reserve. (6 marks)
Hint
15% of 2,50,000 = 37,500.
Answer
Reserves 37,500 + 20,000 = 57,500; dividend 1,00,000. Capital profit = 5,40,000 - 5,00,000 = Rs 40,000, transferred to capital reserve. The remaining gain of Rs 40,000 (5,00,000 - 4,60,000, depreciation written back) is a revenue profit credited to Profit and Loss. Taking Rs 2,50,000 as the net profit before this gain, profit available = 2,50,000 + 40,000 = 2,90,000; profit carried forward = 2,90,000 - 1,57,500 = Rs 1,32,500. Capital reserve = Rs 40,000.
Q4 · 4 marks · Short answerHarder board level
Equipment with a true value of Rs 3,00,000 is shown at Rs 2,60,000 by writing off excess depreciation. Stock is shown at Rs 30,000 below true value and creditors are overstated by Rs 10,000. Find the total secret reserve. (4 marks)
Hint
Add the three.
Answer
Secret reserve = (3,00,000 - 2,60,000) + 30,000 + 10,000 = Rs 80,000.
Q5 · 4 marks · Short answerHOTS / competency
The directors of a firm propose to build a secret reserve this year to "smooth profits". Evaluate this, listing one benefit and two drawbacks, using Rs 25,000 of extra depreciation. (4 marks)
Hint
Users of accounts.
Answer
Benefit: extra Rs 25,000 provides cover for losses later. Drawbacks: the accounts understate profit and assets by Rs 25,000, misleading owners and creditors, and tax and dividend decisions are distorted.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Capital reserve source?Show answer
Capital profit.
2.General reserve is for?Show answer
Any business purpose.
3.Is secret reserve shown?Show answer
No.
4.Dividend equalisation reserve is?Show answer
A specific reserve.
5.Reserve entry?Show answer
P&L Appropriation Dr, To Reserve.

Types of Reserves: General, Specific, Capital and Secret Reserves: frequently asked questions

Can general reserve pay dividends?

Yes.

Where is reserve shown?

On the liabilities side.

Is secret reserve lawful?

Allowed for certain bodies; otherwise it misstates accounts.

Is reserve the same as cash?

No, it is a claim on profits, not cash.