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Question
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?
Options
(A) is correct, but (R) is wrong.
Both (A) and (R) are correct.
(A) is wrong, but (R) is correct.
Both (A) and (R) are wrong.
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Solution
(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.
