spot_img

Difference Between Reserves and Provisions | Accounting & Finance for Bankers

Difference Between Reserves and Provisions | Accounting & Finance for Bankers

In this article, we will talk about the meaning of reserves & provisions & how the two are different from each other. It’s important that the bankers understand the two terms & their proper differentiation to pass the paper 2 of Junior Associate of the Indian Institute of Bankers i.e. Accounting & Finance for Bankers (AFB) NOV 2022.

The Reserve & Provisions are the terms & line items of Financial Statements & form part of all (Statement of Profit & Loss, Balance Sheet & Cash Flow Statement). So, its well understood that JAIIB candidates need to be clear of the accounting terms that fall in the whole applicable JAIIB AFB Syllabus 2022.

Full Course Videos in Hindi English
Check Here
————————————————————-
jaiib ppb short notes part 1
Check Here
————————————————————-
jaiib exam free study material
Check here
————————————————————-
jaiib study material pdf notes 2023
Get Tests Here
————————————————————-
how to prepare for ppb
Check Here

 

So, let us begin with the Meaning of Reserves & Provisions.

MEANING OF RESERVE

Reserve is the term refers to an aggregate or portion of profits that an organisation maintains or holds aside on financial year end towards meeting future contingencies or emergencies that might materialize. It is also used to support the businesses, they also help in keeping the financial position of a company stable when reserves are being used to expand & investing in assets, dividend payments & investments.

Reserves are presented under ‘Reserves and Surplus’ section on the liabilities side of a balance sheet (Financial Statement).

An organization has 2 types of Reserves, namely:
  1. Capital Reserve:A capital reserve is created from the profits earned from capital items and is not available for dispersal to shareholders in the form of dividends or other way. Therefore, Capital Reserves cannot be created from the earnings from the core operations of a business.

    There are several types of capital reserves, including:

      • Profit earned before an enterprise is incorporated,
      • Premiums earned on the issue of debentures and shares,
      • Gains arising from the re-issuance of forfeited shares,
      • Capital redemption reserve
      • Profits from the sale of non-current assets, and
      • Surpluses from revaluations of liabilities and assets.

 

  1. Revenue Reserve:Revenue reserve is the reserve created from the profits earned from the main functions of a organisation or business. A profit and loss appropriation account is required to be made for creating Revenue reserve.

    Revenue reserve is also called as Retained earnings & the same can be used for the following purposes:

    1. To pay dividends to shareholders
    2. To expand the business
    3. To stabilise the dividend rate
    4. To finance a new product of the business
    5. To enter into Merger or acquisitions

What is the Difference Between the Capital Reserve and Revenue Reserve?

Capital Reserves and Revenue Reserves are somewhat alike have different purposes & are made from different sources & both are important. Following are few points of difference between Capital & Revenue Reserves:

Parameters

Capital Reserve

Revenue Reserve

Source of creation

It is composed of the earnings accrued on capital appreciation.

It is composed of the earnings from the normal or core business activities.

Dividend Distribution

Capital Reserve cannot be used for paying dividends to shareholders.

Money lying in the Revenue Reserve can be distributed as dividends among the shareholders.

Purpose of Reserve

Its’ basic purpose is to create or write off capital losses & to fund long-term projects.

Its’ basic purpose is to improve the financial position of the firm and also its expansion.

Usage of the Reserve

Capital Reserve can’t be utilized for purpose other than for what it was created for.

Depending on the type of reserve, businessed can use it accordingly

MEANING OF PROVISION

Provision is the term refered to an amount that is held aside from a company’s profit for the purpose of covering the possible expenditures arising in future or a possible decline in the value of an asset.
Provisions are important for a business as they handle certain expenses in businesses and payments made for those expenses. Provisions are not savings because the purpose of their creation is different i.e. Provisions are basically to meet expenses for an anticipated liability for tomorrow.

Provisions appear in the statement of Profit & Loss in the form of expenses & are recorded as a current liability on the balance sheet.

The Need For Making Provisions In Businesses:

Countless reasons exist for setting aside funds, including the following: Depreciation, renewal, or reduction in asset value, Redemption of Liability, Writing off bad debts/doubtful debts, Contingent Liabilities, Any known liability – whose amount cannot be determined accurately, Specific losses on taxes or asset realization.

What is the Difference Between Reserves and Provisions?

Reserves and provisions are somewhat alike but are created for different reasons and under distinct circumstances. Both are important for a business and one can’t reduce the importance of the other. Following are few points of difference between reserves and provisions.

 Reserves  Provisions
1. Reserves are made to strengthen the financial position of a  business and meet unknown liabilities or losses. 1. Provisions are made to meet specific liability or contingency, e.g. a provision for doubtful debts.
2. Reserves are only made when the business is profitable. 2. Provisions are made irrespective of profits earned or losses incurred by a business.
3. They can be used to distribute dividends to shareholders. 3. They cannot be used to distribute dividends as they are made for specific liability.
4. They are made by debiting P&L Appropriation Account. 4. They are made by debiting P&L Account.
5. It is not mandatory to create reserves for the business, it is mainly done for prudence. 5. Legally, it is mandatory to create provisions.
6. Reserves are shown on the liability side of a balance sheet. 6. Provisions are either shown on the liability side of a balance sheet or as a deduction from the asset concerned.

 

We hope you would now have understood how the reserves & provisions are different from one another & will not mistake provision for reserve or vice-versa.

 

ACCOUNTING & FINANCE FOR BANKERS (AFB) | LATEST JAIIB STUDY MATERIAL 2022

Did you find the above notes easy to understand?

If yes? Then we assure you that you will find the Video lectures prepared by the JAIIBs’ expert faculty much better.

As the exam of JAIIB will soon be due, we recommend that you start your Junior Associate of the Indian Institute of Bankers (JAIIB) Preparation well in time. You can be part of our exclusive Learning Session member & can have access to our premium courses. The key highlights:

  • AFB Live + Recorded Lectures (other papers of JAIIB are also available)
  • Lectures delivered by JAIIB expert faculty of AFB
  • 24 by 7 access to JAIIB materials
  • Access through apps & browser
  • Unlimited views on the video lectures
  • Mock Tests include the AFB Memory Recalled Questions from past exams
  • Mega Mock Tests (2 hours)
  • Recorded AFB classes are also downloadable
  • Most reasonable prices of the packs
  • Language: English language & Hinglish language both are available to chose from
  • AFB Latest Syllabus 2022

Access the Latest JAIIB AFB, PPB, &/or LRB courses 2022 through:

 

REACH US

You can reach us for any query related to Study materials/video classes as well as offers on JAIIB, CAIIB or other IIBF Certification Exams or Bank Promotion Exams on our Whatsapp No.: 8360944207

 

For daily free bank updates, join us:

 

We wish you all the best 👍 for your JAIIB Exams 2022!

Team: Learning Sessions

LEAVE A REPLY

Please enter your comment!
Please enter your name here

🤩 🥳 JAIIB NEW BATCH START 🥳 🤩spot_img
🤩 🥳 JAIIB CAIIB CLASSES 🥳 🤩spot_img

POPULAR POSTS

RELATED ARTICLES

Continue to the category

JAIIB FREE NOTES OF PPB 2024 | BANKING OMBUDSMAN SCHEME

JAIIB FREE NOTES OF PPB 2024 | BANKING OMBUDSMAN SCHEME In this article, we will discuss the Banking Ombudsman Scheme (which falls under the syllabus...

FREE BANK PROMOTION NOTES FOR 2024 | RISK MANAGEMENT 

FREE BANK PROMOTION NOTES FOR 2024 | RISK MANAGEMENT So, the next session has already begun & there should not be anything that does not...

CAIIB RISK MANAGEMENT MOCK TEST 2024

FREE RISK MANAGEMENT MOCK TEST 2024 | CAIIB 2024 This post contains IIBF CAIIB’s paper - Risk Management Mock Tests as per the CAIIB Syllabus...

JAIIB Principles and Practices of Banking Study Material Live Class Previous Year Questions Part 12

JAIIB PPB STUDY MATERIAL LIVE CLASS | PREVIOUS YEAR QUESTIONS PART 12   JAIIB exam is one of the premium flagship courses offered by IIBF twice...