Difference between Reserve and Provision
|
Basis |
Reserve |
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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