Although both provisions and reserves are created to meet the future liabilities of the business but following are some of the points of dissimilarities between the two.
Difference between Provisions and Reserves
|Objective||Created to meet the future known liability the amount of which cannot be determined precisely.||Created to meet the future unknown liabilities.|
|Appropriation v/s Charge||It is a charge against profit||It is an appropriation of|
|Aim||Created to meet the specific liability of the business in the near future||Created for strengthening the financial position of the business|
|Recording||Recorded on the debit side of the Profit and Loss Account||Recorded on the debit side of the Profit and Loss Appropriation Account.|
|The available profits of the business reduce as it is a charge against profits||It does not reduce the profit of the business as it is an appropriation of profits|
|Utilization||Cannot be utilized for the purpose of distribution as profits.||Can be utilized for the purpose of distribution as profits.|
|Creation||It is compulsory to create even if there are no profits||It is not compulsory to create. Therefore, in cases of inadequate profits, it is not created|
|It can never be invested outside the business||It can be invested outside the business|
|It is shown either on the Assets Side as a deduction from the concerned asset or can be shown on the Liabilities Side||It is shown on the Liabilities side of the Balance Sheet under the head Reserves and Surplus|
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