7.12.1 Difference between Reserve and Provision

. . Difference between Reserve and Provision The points of difference between reserve and provision are explained below: . Basic nature : A provision is a charge against profit whereas reserve is an appropriation of profit.

Hence, net profit cannot be calculated unless all provisions have been debited to profit and loss account, while a reserve is created after the calculation of net profit. . Purpose : Provision is made for a known liability or expense pertaining to current accounting period, the amount of which is not certain. On the other hand reserve is created for strengthening the financial position of the business.

Some reserves are also mandatory under the law. . Presentation in balance sheet : Provision is shown either (i) by way of deduction from the item on the asset side for which it is created, or (ii) on the liabilities side along with current liabilities. On the other hand, reserve is shown on the liabilities side after capital.

. Effect on taxable profits : Provision is deducted before calculating taxable profits. Hence, it reduces taxable profits. A reserve is created from profit after tax and therefore it has no effect on taxable profit.

. Element of compulsion : Creation of provision is necessary to ascertain