Difference between Provisions and Reserves
The difference between provisions and reserves are as under-
S. No.
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Particulars
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1.
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Meaning
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Provisions are created to meet a known liability.
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Reserves are created to meet an unknown liability.
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2.
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Object
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The object of provision is to provide for
- Provision for Deprecation
- Provision for Doubtful debts
- Provision for Income tax etc.
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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
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3.
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Mode of Creation
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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.
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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.
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4.
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Investment
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Provisions are never invested outside the business.
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Reserves may be invested outside the business.
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5.
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Shown in Balance Sheet
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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.
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Reserves are shown on the liabilities side under the head “Reserves and Surplus”
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6.
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Utilisation for payment of dividends
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Provisions cannot be utilized for distribution as dividends among shareholders.
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Reserves can be utilized for distribution as dividends among shareholders.
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7.
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Utilisation for other purpose
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Provisions are created to provide for a specific loss and hence can only be used for meeting that loss.
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Reserves are created to provide for a specific loss and hence can be used for any purpose.
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8.
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Necessity
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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.
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Creation of reserves is discretionary. It can be created only if adequate profits have been earned. Reserves are an Appropriation of Profit.
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9.
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Compulsion
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Yes, as per GAAP
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Optional except for some reserves whose creation is obligatory.
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