Question

What are reserves and provisions in auditing?

Answer 1

• Reserves: are created to save a concern from future losses and liabilities. Reserves can be made only out of profit. The reserve is created to meet any probable future liabilities or losses. Reserves reduced divisible profits. Reserves, if remain unutilized for some period, can be distributed as dividends.

• Provisions: The creation of provisions is legally necessary. Provisions are a charge to profit. The purpose of the provision is very specific. Provisions reduce the profit. Provisions cannot be transferred to the General Reserve for distribution.

Also read:

• Difference Between Reserve and Provision
• Provision Examples