Distinguish between provision and reserve.

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Solution

Basis of Difference

Provision

Reserve

Meaning

It is created to meet the known liability.

It is created to meet unknown liability.

Nature

Provision is charged against profit.

Reserve is appropriation of the profit.

Purpose

It is created for a specific liability.

It is created for strengthening the financial position.

Mode of creation

It is created by debiting the profit and loss account.

It is created by debiting the profit and loss appropriation account.

Use for payment of dividend

It cannot be used for payment of dividends.

It can be used for payment of dividends.

Creation

Creation of provision is compulsory. It is created even if there is no profit.

Creation of reserve depends on the discretion of the management. It is created only when there is profit.

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Basis of Difference	Provision	Reserve
Meaning	It is created to meet the known liability.	It is created to meet unknown liability.
Nature	Provision is charged against profit.	Reserve is appropriation of the profit.
Purpose	It is created for a specific liability.	It is created for strengthening the financial position.
Mode of creation	It is created by debiting the profit and loss account.	It is created by debiting the profit and loss appropriation account.
Use for payment of dividend	It cannot be used for payment of dividends.	It can be used for payment of dividends.
Creation	Creation of provision is compulsory. It is created even if there is no profit.	Creation of reserve depends on the discretion of the management. It is created only when there is profit.