What is the Difference Between Reserves and Provisions?

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.

 

 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.