6. Use for the payment of dividend : Provision cannot be used for distribution

. Use for the payment of dividend : Provision cannot be used for distribution as dividends while general reserve can be used for dividend distribution. Basis of Difference Provision Reserve . Basic nature Charge against profit. Appropriation of profit. . Purpose It is created for a known It is made for strengthening liability or expense pertaining the financial position of to current accounting period, the business.Some reserves the amount of which is not are also mandatory under law. certain. . Effect on taxable It reduces taxable profits. It has no effect on taxable profits. profit. . Presentations in It is shown either (i) by way It is shown on the liabilities. Balance sheet of deduction from the item on side after capital amount. the asset side for which it is created, or (ii) In the liabilities side along with current liabilities. . Element of Creation of provision is Generally, creation of a Reserve compulsion necessary to ascertain true is at the discretion of the mana- and fair profit or loss in gement. Reserve cannot be compliance ‘Prudence’ or created unless there are profits. ‘Conservatism’ concept. However, in certain cases law It must be made even has stipulated for the creation if there are no profits. of specific reserves such as ‘Debenture’ ‘Redemption ’ reserve. . Use for the payment It can not be used for It can be used for divided of dividend dividend distribution. distribution. Fig. . : Showing comparison between provisions and reserves