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PROVISION IS A CHARGE AGAINT PROFIT AND IT REDUCES THE VOLUME OF PROFIT OF A BUSINESS.ON THE OTHER HAND RESERVE IS A CREATION FROM PROFIT AND IS PUT TO A SEPERATE ACCOUNT CALLED RESERVE BY WHATEVER NAME CALLED FOR MEETING FUTURE REQUIREMENTS.

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Provision- It is amount created out of receivables, to account for the risk that the full amount shall not be receivable by the company. For example- we can make provision on debtors, if we are of the opinion that we might receive lesser amount. It is created for true and fair view. For example- debtors relate to 2017-18, but they refused to pay in 2018-19. This way complete loss will be booked in 2018-19, affecting profits. It can lead to manipulation of accounts as well. However, if we will make provision in 2017-18, then partial burden of loss will be shared in 2017-18 and the financial statement shall depict true and fair view.

Reserves- Reserve are the amount of profit kept aside so as to retain them in the company for different purpose, example, buying a new machinery, paying back of loans, paying to debentureholders, expansion purposes, furture investment to be make, etc.

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Provisions : In simple words if we have to define Provisions it can be said that any expenditure which is known but is not incurred/paid till date and is realted to same period for which accounting is done. following example will explain the provsions.

Consider we have purchased some item of which bills are not yet received and the Account period is getting closed then in that case the amount for which the bill is receivable is provided for as an expenditure as it relates to same period.

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provision is charge aganist profit

reserve is a approriation of profit

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 Basic nature: A provision is a charge against profit while reserve is an appropriation of profit. Therefore, 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.

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The Provision means to keep some money for a known liability which is probable to arise after a certain time while The Reserve is to retain some money from the profit to for any particular future use. Provision for taxation, Salary, or expenses is best example. Provision amount cannot be used else specified but Reserve amount can be used for another expenses (Capital or Revenue) as per law

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Provision and reserves both are created for covering future losses. If we do not make, we can face lots of losses and it will be impossible for us to survive by tolerating such losses. So, as a good person, we need to create provisions and reserves. But both are different terms. You cannot use one term for other all the times. Know its main differences for proper use of both accounting terms. 1. Meaning  Provision : Provision is created to show certain liability. For example, from past experience, we have know there will be 10% bad debts out of total debtor asset. So, out of total revenue, we deduct provision for doubtful debt as show it as current liability. Reserve : Reserve is created to show unknown liability. For example, we are doing business in share market. It is risky business. So, we have created Risk for fluctuation in share market as $ 20,000. In past experience, there was no loss but still we are showing it as liability and deducting from our total revenue. 2. As per Law  Provision : As per law, to create provision is necessary. That is reason, we show it as expense side in profit and loss account. Reserve : As per law, to create reserve is not necessary. That is the reason, we deduct it out of net profit by making profit and loss appropriation account. 3. Aim of Creation Provision : Main aim is to create provision to cover loss due depreciation and bad debts. So, we can buy new fixed asset and invest more money in debtors. Reserve : Main aim of reserve is to provide financial strength to the business. 4. Accounting Treatment Provision : We debit the profit and loss account and credit the provision account. Reserve : We debit the profit and loss appropriation account and credit reserve account. 5. Investment Provision : Fund created with provision can not be invested outside the business Reserve :  Fund created with reserve can be invested outside the business. 6. Showing in Balance Sheet  

Provision :  It is shown in balance sheet by deducting specific asset. Reserve :  It is shown in the liability side of balance sheet under reserve and surplus heading. 7. Use of Dividend Provision :  It can not be used for giving dividend to shareholder. Reserve :  It can be used for giving dividend to shareholder. 8. Other Usage  Provision :   It is created for covering specific loss, so use for same purpose. For example, provision for depreciation fund can only be used for buying new fixed asset. Reserve : Reserve can be used by any other purpose.

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Provisions are amount kept aside out of profit for :-

1. Meet up for safegaurding business from future antipated business losses

2. Meet up payment of liabilities which is known but its amount to be paid in futre is unknown.eg Provision for Tax

Reserve is amount kept aside out of profits also but to be utilised for business growth at future. It is plough back of profit and become the resource which acts as internal funds for business.

Thus in simple tems if u fall ill and take medical pills to safegaurd ur future health its like provision. While u use facial cream and health products to ehance ur beauty and health at future its like reserve.

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Differences between provisions and reserves are:

A. Provisions are amounts set aside for a specified purpose. Reserves are for a generic purpose

B. Provisions are charge against profits whereas reserves are appropriation of profits.

C. Examples are provision for bad debts/ provision for depreciation; general reserves

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Hello Harshit

The following are the main differences between reserve and provision: 1. Mode Of Creation Reserve is created against the charge of the profit and loss appropriation account. Provision is created against the charge of the profit and loss account. 2. Objective Main objective of reserve is to strengthen the financial position and to meet future unknown losses and liabilities. Objective of provision is to meet known losses and liabilities the amount of which is not certain. 3. Accounting Treatment Reserve is shown on debit side of profit and loss appropriation account and liabilities side of balance sheet. Provision is shown on debit side of profit and loss account and assets side of balance sheet as deduction from the concerned asset. 4. Relation With Profit Reserve is created when there is enough profit in the business. Provision is created even if there is loss in the business. 5. Distribution Reserve can be distributed to shareholders as dividend. Provision can not be distributed as dividend to shareholders. 6. Future Requirement Reserve is created without considering the future requirement of the business. Provision is created by estimating the future requirement of the business. 7. Impact Impact of reserve will be on financial position. Impact of provision will be on profit or loss of the business.