9 Differences between Provisions and Reserves

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

Point of
Distinction
ProvisionsReserves
ObjectiveCreated to meet the future known liability the amount of which cannot be determined precisely.Created to meet the future unknown liabilities.
Appropriation v/s ChargeIt is a charge against profitIt is an appropriation of
profits
AimCreated to meet the specific liability of the business in the near futureCreated for strengthening the financial position of the business
RecordingRecorded on the debit side of the Profit and Loss AccountRecorded on the debit side of the Profit and Loss Appropriation Account.
Effect on
Profit
The available profits of the business reduce as it is a charge against profitsIt does not reduce the profit of the business as it is an appropriation of profits
UtilizationCannot be utilized for the purpose of distribution as profits.Can be utilized for the purpose of distribution as profits.
CreationIt is compulsory to create even if there are no profitsIt is not compulsory to create. Therefore, in cases of inadequate profits, it is not created
Investment
of Amount
It can never be invested outside the businessIt can be invested outside the business
Disclosure in
Balance
Sheet
It is shown either on the Assets Side as a deduction from the concerned asset or can be shown on the Liabilities SideIt is shown on the Liabilities side of the Balance Sheet under the head Reserves and Surplus

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