The retention of profits in the form of...................reduces the amount of profits available for distribution among the owners of the business.

Reserve

The correct answer is option 2- Reserve.

A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingencies such as workmen compensation. Reserves are the appropriations of profit to strengthen the financial position of the business. Reserve is not a charge against profit as it is not meant to cover any known liability or expected loss in future. However, retention of profits in the form of reserves reduces the amount of profits available for distribution among the owners of the business. It is shown under the head Reserves and Surpluses on the liabilities side of the balance sheet after capital.

OTHER OPTIONS-

* Provision- A provision is a charge against profit. It is created for a known current liability the amount of which is uncertain.

* Depreciation-  Depreciation is a decline in the value of a tangible fixed asset. In accounting, depreciation is the process of allocating depreciable cost over the useful life of a fixed asset.