What is the difference between provision and reserve?

Basic answer,  provision is a charge to the profit whilst a reserve is an appropriation to the profit. Reserves belongs to the owners equity side while provision can be on a liability side or on the assets side but as a negative asset.

Following are the points of difference between provision and reserve

Provisions

1. 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.

Reserve

1. 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.