What is 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.
|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.|