What is the difference between provision and reserve
Provision is created against revenue of the firm to compensate the future losses.Reserves are created against profit of the firm , it is used for growth or expansion of business.
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.
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.
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.
Impact of reserve will be on financial position. Impact of provision will be on profit or loss of