Difference Between Provision and Reserve

Difference between Provision And Reserve:

1. Provision is a charge against profit.

Reserve is an appropriation of profit.

2. Creation of provision is a legal necessity. Provisions have to show the true financial position of the business.

Creation of reserve is discretionary. It can be created only if adequate profits have been earned.

3. The object of making provision is to show the true financial position of the business.

The object of the reserve is to strengthen the financial position of the business.

4. Provision is created to meet a known liability.

Reserves are created to meet an unknown liability.

5. Provision is created by debiting to P&L A/c and it’s creation reduces the net profit.

Reserves are created by Debiting P&L appropriation A/c and, therefore, it’s creation does not reduce the net profit but reduces the divisible profit.

6. If a provision is created against any assets, the same is shown as a deduction from the respective assets on the assets side of the balance sheet. Otherwise, it is shown as Separate item on the liability side under the head provision.

It is shown on the liability side under the head reserve and surplus.

7. Provision is created to provide for a specific loss and hence it cannot be utilised for distribution as dividends among shareholders.

Since the reserve is not created to provide for any specific loss, it can be used for distribution as dividends among shareholders.

Difference between Provision and Reserve are likely opposite of Each other.

Related: 

  1. WHAT ARE RESERVES?
  2. DIFFERENT TYPES OF RESERVES

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