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Reserve

Profits retained in the business which are not attributable to any provisions and provisions in excess of the amount considered necessary for the purpose for which these were originally made are to be treated as reserves.

 

Example: General reserve, Contingency reserve

Impact on financial statements

  • Transfer to reserve will decrease the divisible profits
  • It is shown in the Balance sheet under the head Reserves and Surplus

Difference between Provision and Reserves

 

 

Provision

Reserve

Meaning

Provision is a charge against profit

Reserve is appropriation of profit

Purpose

Provision is created for a specific object

Reserve is created for probable losses

Profitability

Provision is created irrespective of the profitability of the company

Reserve is created only in case the company is in profit

 

Profits

Provision reduces the net profit and is not invested in outside securities

Reserve reduces divisible profit and can be invested in outside securities

Example

Provision for tax, provision for doubtful debts, depreciation, etc.

General reserve, contingency reserve, etc.





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