Question

Distinguish between 'provision' and 'reserve'.

Answer 1

Difference between Provision and Reserve

$\begin{array}{ccc}\text{Basis of Difference}& \text{Provision}& \text{Reserve}\\ \text{Basic nature}& \text{Charge against profit.}& \text{Appropriation of profit.}\\ \text{Purpose}& \text{It is created for a known liability}& \text{It is made for strengthening the}\\ & \text{or expense pertaining to current}& \text{financial position of the}\\ & \text{accounting period, the amount}& \text{business. Some reserves are}\\ & \text{of which is not certain.}& \text{also mandatory under law.}\\ \text{Effect on taxable}& \text{It reduces taxable profits.}& \text{It has no effect on taxable profit.}\\ \text{profits}& & \\ \text{Presentation in}& \text{It is shown in the liabilities side}& \text{It is shown in balance sheet}\\ \text{financial statements}& \text{along with current liabilities. As}& \text{liabilities side after capital}\\ & \text{it is a liability against some}& \text{amount.}\\ & \text{specified thing.}& \\ \text{Uses}& \text{It can be used for specified}& \text{It can be used for dividend}\\ & \text{purpose and cannot be used for}& \text{distribution}.\\ & \text{dividend distribution.}& \end{array}$