I n t e r a c t I v e t e X t foundations in Accountancy/ acca financial accounting (ffa/FA) bpp learning Media is an acca approved Content Provider

 EXAM FOCUS POINT 

Dividends which have been paid are shown in the statement of changes in equity (see Chapter 20). 

They are not shown in the statement of profit or loss, although they are deducted from retained 

earnings in the statement of financial position. Proposed dividends are not adjusted for, they are simply 

disclosed by note. 

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PART F: PREPARING BASIC FINANCIAL STATEMENTS 

 

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retaining some profit each year is to enable the company to pay dividends even when profits are low (or 

non-existent). Another reason is usually shortage of cash. 

Very occasionally, you might come across a debit balance on the retained earnings account. This would 

indicate that the company has accumulated losses. 

3.5 Distinction between reserves and provisions 

A 

reserve 

is an appropriation of distributable profits for a specific purpose (eg plant replacement) while a 

provision is an amount charged against revenue as an expense. A provision relates to a diminution in the 

value of either an asset or a known liability (eg audit fees), the amount of which cannot be established 

with any accuracy. 

Provisions 

or allowances (for depreciation etc) are dealt with in company accounts in the same way as 

in the accounts of other types of business.