What is the Difference Between Reserve and Provision?

The main difference between a reserve and a provision lies in their purposes and how they are treated in financial statements. Here are the key differences:

1. Purpose: A provision is an amount set aside to cover an anticipated liability or loss, while a reserve is a portion of a company's profit set aside for specific purposes or to strengthen the company's financial condition through development or expansion.
2. Creation: Provisions are required by law and are created to meet specific liabilities and fulfill legal requirements. Reserves, on the other hand, are created from profits and are not mandatory.
3. Treatment in Financial Statements: Provisions are recorded as expenses on the income statement, reducing the company's reported profit. Reserves do not appear on the income statement and are included in the shareholders' equity section of the balance sheet.
4. Examples: Examples of provisions include Provision for Depreciation, Provision for Doubtful Debts, Provision for Taxation, and Provision for repairs. Examples of reserves include Capital Reserve, Revenue Reserve, and General Reserve.

In summary, provisions are created to meet known liabilities or expenses and are required by law, while reserves are created from profits for specific purposes or to strengthen the company's financial condition. Provisions appear as expenses on the income statement, whereas reserves are included in the shareholders' equity section of the balance sheet.

Comparative Table: Reserve vs Provision

The main difference between a reserve and a provision lies in their purpose and usage. Here is a table summarizing the key differences between reserves and provisions:

In summary, provisions are set aside to cover anticipated future liabilities, while reserves are created to retain a portion of earnings for future use. Provisions are charges against earnings, whereas reserves are appropriations of profits. Provisions can only be used for the specific purpose they were created for, while reserves can be used for various purposes, including paying dividends and expanding the business.