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Difference-between-Provision-and-Reserve

 

Difference between Provision and Reserve

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The difference between provision and reserve are as under-

S. No.

Particulars

1.

Meaning

Provisions are created to meet a known liability.

Reserves are created to meet an unknown liability.

2.

Object

The object of provision is to provide for

  • Provision for Deprecation
  • Provision for Doubtful debts
  • Provision for Income tax etc.

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

  • Revenue Reserves are General Reserve or Specific reserve
  • Capital Reserves

3.

Mode of Creation

Provisions are created by debiting to Profit & Loss Account. Hence, net profit cannot be calculated unless all provisions have been debited to P&L Account.

Reserves are not created by debiting to Profit & Loss Account but through Profit & Loss Appropriation A/c. It is created after the calculation of net profit.

4.

Investment

Provisions are never invested outside the business.

Reserves may be invested outside the business.

5.

Shown in Balance Sheet

Provisions are shown on the assets side by way of deduction from the asset for which it is crated or as a distinct item on the liabilities side.

Reserves are shown on the liabilities side under the head “Reserves and Surplus”

6.

Utilisation for payment of dividends

Provisions cannot be utilized for distribution as dividends among shareholders.

Reserves can be utilized for distribution as dividends among shareholders.

7.

Utilisation for other purpose

Provisions are created to provide for a specific loss and hence can only be used for meeting that loss.

Reserves are created to provide for a specific loss and hence can be used for any purpose.

8.

Necessity

Creation of provisions is a legal necessity. Provisions have to be provided for even if there are no profits. Provisions are a charge against profits.

Creation of reserves is discretionary. It can be created only if adequate profits have been earned. Reserves are an Appropriation of Profit.

9.

Compulsion

Yes, as per GAAP

Optional except for some reserves whose creation is obligatory.

 



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