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.
| 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. |
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