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What is the difference between Reserves and Provisions?


Reserves: It is an appropriation of profit. Company kept aside some amount of profit to meet future contingencies. Reserve is created to meet the uncertain events of future. Reserve is divided into two parts: capital reserve and revenue reserve. A capital reserve is created from capital gain which arises from profit on sale of fixed assets, premium on issue of new shares etc. The capital reserve is not available for dividend distribution. It is available for capital losses. A revenue reserve is created from revenue profit. The revenue reserve is further divided into two parts: general reserve and specific reserve. General reserve is created to meet the uncertain future needs. Specific reserve is created for particular purpose like debenture redemption fund, reserve for discount etc. To make the growth and strength of a company reserve is required in a company. Reserve act as an internal source of finance for a company. If any year there is no profit, in that case the profit kept as reserve is used to pay dividend to the shareholders.  
Provisions: Some amount kept aside to meet the future known liability is known as provision. Provision is charged against profit. The profit is not necessary to create the provision. There are different types of provision created in a company like provision of debt, provision of tax etc. The amount of provision is determined with the help of past data for which provision is created. If provision is available for adjustment in financial statement then it is mention in two places first of all in debit side of income statement and secondly it is shown in liability side of balance sheet.
Reserve and provision both are essential for company to meet the future needs. But still there is some differences between them like reserve help to meet the future uncertainties and provision helps to meet the future known liability.
Difference between reserve and provision:
Point of difference
Reserve
Provision
What is reserve and provision?
Reserve is an amount kept aside to meet the future uncertainties.
Provision is an amount kept aside to meet the future known liability.
What is the purpose to create reserve and provision?
Reserve is created to meet the future uncertainties. It is use to strengthen the financial position and reinvest in a business for growth of a company.
Provision is created to meet the future known liability.
Where to show reserve and provision in financial statement?
Reserve is shown in liability side of balance sheet. It is shown under the heading of Reserve and Surplus.
Provision is shown in liability side of balance sheet or deducted from related assets. It is shown under the heading of Current liability.
Which one is use as dividend distribution to shareholders provision or reserve?
Reserve is use to distribute as dividend to shareholders.
Provision is not use to distribute as dividend to shareholders.
Is Profit required to maintain the reserve or provision or not?
Profit is essential to create the reserve. The part of profit is retaining as a reserve in a company.
Profit is not necessary to create the provision.



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