Differences between Revenue Reserves and Provisions
The following are some of the differences between revenue reserves and provisions.
| Revenue Reserves | Provisions |
|---|---|
| 1. Reserves are created by appropriating the profit. | 1. Provisions are made by charging against the profit i.e, debiting the profit and loss account. |
| 2. Reserves can be created only if there is profit. | 2. Provisions are made even when there is a loss. |
| 3. Reserves are created for general or special purpose. | 3. Provisions are made for specific purpose. |
| 4. Under very few circumstances, creation of reserves is legally required — such as creation of capital redemption reserve at the time of redemption of preference shares. In most circumstances, creation of reserves is decided by the management. | 4. Provisions are to be made to present the true and fair state of affairs and making provisions are not discretionary. |
| 5. Reserves can be capitalised and bonus shares can be issued. | 5. Provisions cannot be capitalised. |
| 6. Reserves are not made for exact amount required. (exception - Capital redemption reserve) | 6. Provisions are made for the exact amount estimated and if any provision is found to be in excess, the same may be treated as reserve. |
| 7. All reserves except capital redemption reserve can be distributed as dividend. | 7. Provisions cannot be distributed as dividend. |
| 8. Surplus and deficit in creation of reserve will not affect the true and fair view of the state of affairs. | 8. Surplus or deficit in making provision will adversely affect the true and fair view shown by the profit and loss A/c. |
| 9. In the case of reserves, it is enough if the auditor verifies whether the company has complied with the provisions of Articles of Association and the Company Law while creating reserves under certain circumstances. | 9. In the case of Provisions, an auditor has to carefully examine the provisions made and ensure that all the provisions are made for the exact amount required. |
| 10. Reserves are to be disclosed in the balance sheet, in the liabilities side under the head "reserves and surplus". | 10. Provisions are to be disclosed under the head "current liabilities and provisions". |
| 11. Creation of reserves strengthens the financial position of the company. | 11. It is not so in the case of provisions made. |
Refer this article, Audit of Provisions | Duties of Auditor to know more about provisions audit.
