What are the differences between the provision and Reserve ?

A reserve is an appropriation of profits for a specific purpose. The most common reserve is a capital reserve, where funds are set aside to purchase fixed assets. By setting aside a reserve, the board of directors is segregating funds from the general operating usage of a company.

There is no actual need for a reserve, since there are rarely any legal restrictions on the use of funds that have been "reserved." Instead, management simply makes note of its future cash needs, and budgets for them appropriately. Thus, a reserve may be referred to in the financial statements, but not even be recorded within a separate account in the accounting system.

A provision is the amount of an expense or reduction in the value of an asset that an entity elects to recognize now in its accounting system, before it has precise information about the exact amount of the expense or asset reduction. For example, an entity routinely records provisions for bad debts, sales allowances, and inventory obsolescence. Less common provisions are for severance payments, asset impairments, and reorganization costs.

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Both Provision and reserve are appearing on the liability side of Balance sheet but there is lot of difference between these two which is as under:

• Meaning: Reserve is portion of retained earnings typically its a part of accumulated profit on the other hand provision is arrangement made for payment of expenses which are unpaid or needs to be paid in future.

• Relation With Profit : Reserve is created when there is enough profit in the business. Provision is created even if there is loss in the business.

• Effect : Provision is shown under current liabilities and added in expenses in income statement on the other hand provision are shown under owners equity.

• Example : General Reserve, Legal Reserve, Capital Reserve on the other hand Provision for commission, provision for Doubtful debts, provision for bonus, provision for gratuity.

• Distribution : Reserve can be distributed to shareholders as dividend. Provision can not be distributed as dividend to shareholders.

• Impact : Impact of reserve will be on financial position. Impact of provision will be on profit or loss of the business.

   

The provision is a kind of expenses and appears in the income statement and in the current liabilities  but the reserve is a contribution for the net profit and will appear in the owners equity

a reserve is an appropriation of profit for a specific purpose, while a provision is a charge for an estimated expense.

Reserves1. It is created by debiting the profit and loss appropriation account.2. It is created to meet an unknown liability, or to strengthen the financial position of the company or for equalization of dividends etc.3. A reserve is created only when there is profit in the business.4. It can be distributed among shareholders as dividend.5. The reserve is created without taking into consideration the actual amount required except in the case of redemption of debentures when a definite sum is set aside.6. Creation of reserve depends upon the financial policy of the business and discretion of its management.7. It is usually shown on the liability side of the balance sheet as it is not a specific reserve.Provisions1. It is created by debiting the profit and loss account.2. It is created to meet a known liability or a specific contingency, e.g.. provision for bad and doubtful debts, or provision for depreciation etc.3. A provision is created irrespective of whether there is profit or loss in the business.4. It is not available for distribution as dividend among shareholders.5. A provision is made for a definite amount and, therefore, a definite sum is set aside every year to meet the known contingency.6. Making of a provision is a must to meet known liability or contingency.7. The provision is generally shown on the assets side of the balance sheet.

A reserve is an appropriation of profits for a specific purpose. The most common reserve is a capital reserve, where funds are set aside to purchase fixed assets. By setting aside a reserve, the board of directors is segregating funds from the general operating usage of a company.

A provision is the amount of an expense or reduction in the value of an asset that an entity elects to recognize now in its accounting system, before it has precise information about the exact amount of the expense or asset reduction. For example, an entity routinely records provisions for bad debts, sales allowances, and inventory obsolescence. Less common provisions are for severance payments, asset impairments, and reorganization costs.

In short, a reserve is an appropriation of profit for a specific purpose, while a provision is a charge for an estimated expense.

Provisions are made to meet the expenses in the ensuing period after the closure of the accounting period. Reserve is apportionment of profit to purchase  an asset or meeting capital expenditure.

la constitution de réserves est obligatoire en tous les cas pour chaque entreprise lors de sa création, alors que les provisions sont constituées pas l'entreprise au cas de risque de perte probable relative aux règlements des clients(litige) ou bien la perte probable de valeur des titres et valeurs de placement et des titres de participation, provisions pour risques et charges, et provision des stocks au cas de dépreciation de leurs valeurs.

The following are the main differences between reserve and provision:1. Mode Of CreationReserve is created against the charge of the profit and loss appropriation account. Provision is created against the charge of the profit and loss account.2. ObjectiveMain objective of reserve is to strengthen the financial position and to meet future unknown losses and liabilities. Objective of provision is to meet known losses and liabilities the amount of which is not certain.3. Accounting TreatmentReserve is shown on debit side of profit and loss appropriation account and liabilities side of balance sheet. Provision is shown on debit side of profit and loss account and assets side of balance sheet as deduction from the concerned asset.4. Relation With ProfitReserve is created when there is enough profit in the business. Provision is created even if there is loss in the business.5. Distribution Reserve can be distributed to shareholders as dividend. Provision can not be distributed as dividend to shareholders.6. Future RequirementReserve is created without considering the future requirement of the business. Provision is created by estimating the future requirement of the business.7. ImpactImpact of reserve will be on financial position. Impact of provision will be on profit or loss of the business.

Main differences between provision and reserves are:

Provision

It is a possible loss so it is created by debiting profit and loss account.

It is a charge against profit

Profit or loss is effected by its creation - profit decreases or loss increases.

Its amount must be sufficient to meet the loss or liability

Main aim is to cover loss e.g due to depreciation and bad debts etc.

Reserve

It is a portion of profit earned by business. It is created by debiting profit and loss appropriation account.

It is an appropriation of profit

It does not effect profit or loss, since it is created after ascertaining profit.

Its amount is generally determined by management on the basis of the amount of profit earned.

Main aim of reserve is to provide financial strength to the business.

Provision is charged against profit while reserves is an appropriation of profit