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.