Correct Answer
✅ Option B — II & III above
All Options:
- AI & II above
- BII & III above ✓
- CIII & IV above
- DII & IV above (2 Marks)
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Detailed Solution & Explanation
Explanation:
Let's analyze each statement from first principles under the Companies Act, 2013 and Schedule III:
- **Statement (I)**: Incorrect. Reserves are amounts set aside out of profits and other surpluses to strengthen the financial position or meet future contingencies. They are *not* earmarked for any specific liability or commitment known at the date of the balance sheet. (It is "provisions" that are created for specific liabilities/commitments).
- **Statement (II)**: Correct. Securities Premium is a capital reserve representing premium received on the issue of shares. Its usage is restricted under Section 52(2) of the Companies Act, 2013.
- **Statement (III)**: Correct. Under Schedule III, a debit balance in the Statement of Profit and Loss (accumulated loss) is shown as a negative figure under the head "Surplus". The balance of the "Reserves and Surplus" head is shown net of this negative balance.
- **Statement (IV)**: Incorrect. Certain reserves (like Capital Redemption Reserve, Securities Premium, and Revaluation Reserve) are restricted reserves. By law, they can only be used for specific statutory purposes (such as issuing fully paid bonus shares or writing off preliminary expenses) and *cannot* be used to augment general working capital.
Thus, statements (II) and (III) are correct, which corresponds to Option B.
Hence, **Option B** is the correct answer.
Key Concepts to Understand
Profit and Loss Account
The second part of the final accounts that records all indirect incomes and indirect expenses to determine the Net Profit or Net Loss for the accounting period. It starts with Gross Profit from the Trading Account.
Working Capital
The excess of current assets over current liabilities, representing the short-term liquidity available to a business for its day-to-day operations. Positive working capital indicates good short-term financial health.
Reserves and Surplus
Accumulated profits and specific provisions retained in the business rather than distributed to shareholders. Reserves are appropriations of profit (General Reserve, Capital Reserve), while Surplus is the undistributed balance in the P&L Account.
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