Differences between reserves and provision
Differences between reserves and provision
The points of distinction between reserves and provision are given in the following table.
| Bases | Reserves | Provisions |
|---|---|---|
| 1. Method of Creation | It is created by debiting Profit and Loss Appropriation Account. | It is made by debiting Profit and Loss Account. |
| 2. Necessity for creation | It is a question of business policy of a concern and not compulsory. | The creation provisions is compulsory. |
| 3. Objective | A reserve is a sum for an unknown liability. | A provision is a sum for a known liability. |
| 4. Feature | It strengthens the financial position of a business. It adds to the amount of working capital. | It meets out a specific loss on realisation of an asset or an accruing liability. It is for meeting out an anticipated loss or liability. |
| 5. Need | It depends upon financial policy of a concern. | It depends upon financial urgency to make a provision. It is a "must". |
| 6. Amount | The amount of a reserve depends upon the policy and discretion of the management. | The amount of a provision cannot be ascertained accurately at the date of the Balance Sheet, though the liability is known. |
| 7. Available for distribution of dividends | It is available for distribution as dividend. | It is not so available. |
| 8. Nature | It is an appropriation of profits. If there are profits, reserve will be created, otherwise no reserve need to be created. | It is a charge against profits. It means that if there is a loss in a company, provision is a "must" and has to be made. |
| 9. Exhibited | Shown on the liability side of the Balance Sheet. | It is shown on both the sides of Balance Sheet. |
| 10. Utilization | Amount can be utilised for any purpose because they represent undistributed profits. | Amount cannot be utilised for purposes other than that for which they are created. |
