Difference between Reserve and Provision
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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