Differences between Provision and Reserves

Book keeping -1984, 1987, 1988, 1995 (Most Important question)

Differences between

Provision	Reserves
1.       Meaning: Provide for a future expected liability.	1.       Meaning: Retain a part of profit for future use.
2.       Charge against profit.  That means Provision is created before arriving Profit/Loss. That is Debiting the P&L A/c	2.       Appropriation of profit.  That means Reserve is created after arriving the profit only. That is debiting P&L Appropriation A/c
3.       Provides for known liabilities and anticipated losses. Example:  Reserve for Bad & Doubtful Debts (RBDD)	3.       Provides for increase in capital employed.  Example: Reserve for creation of Capital Asset/General Reserve
4.       Presence of profit is not required to create Provision	4.       Profit must be present for the creation of reserves.
5.       In case of assets it is shown as a deduction from the concerned asset while if it is a provision for liability, it is shown in the liabilities side.	5.       Shown on the liabilities side.
6.       Dividend can never be paid out of provisions.	6.       Dividend can be paid out of reserves.
7.       Provisions can only be used, for which they are created.	7.       Reserves can be used for any use as per the decision of Management.

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