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Differences Between Reserve And Provision
The following are the main differences between reserve and provision:
1. Mode Of Creation
Reserve 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. Objective
Main 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 Treatment
Reserve 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 Profit
Reserve 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 Requirement
Reserve is created without considering the future requirement of the business. Provision is created by estimating the future requirement of the business.
7. Impact
Impact of reserve will be on financial position. Impact of provision will be on profit or loss of the business.
Reserve is created when profit is earned..whereas provision is created even when loss is incurred.
