Difference between Reserve and Provision




1. Nature

It is an appropriation of profit.

It is a charge against profit.

2. Purpose

It is created to strengthen the financial position and to meet unforeseen liabilities or losses.

It is made to meet known liability or contingency, if the amount is not determined.

3. Effect on Profit

It is debited to the Profit and Loss Appropriation Account. Hence, profit is not affected.

It is debited to the Profit and Loss Account, Hence, profit is reduced.

4. Investment

It may be invested outside the business.

It is not invested.

5. Distribution

Unutilised part can be distributed as dividend. It reduces divisible profits.

It cannot be used for distribution as profit/ dividend. It reduces net profits.

6. Compulsion/ Prudence

It is created out of profits as a matter of prudence and due to legal requirements.

It is made because of accounting principles (Prudence).

7. Presentation

A reserve is shown on the

liabilities side of Balance Sheet under the head 'Reserves and Surplus'.

It is shown either as a liability

under the head 'Current Liabilities' or as deduction from the asset.

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