Here we detail about the difference between Provisions and Reserves.
1. Provisions are charge on profits.
2. Creation of provision does not depend on profit. They have to be created even if there are inadequate profits or heavy losses.
3. They are created to meet a known liability
4. Creation of provision is necessary as per law.
5. Provisions are recorded on the debit side of Profit and Loss Account.
6. Provision may appear on either side of the balance sheet by way of deduction from the concerned asset or separately on the liabilities side.
7. Provision can never be invested outside business
8. Provision can never be distributed as profit unless actual liability is less than the amount provided for.
9. Provision reduces net profit.
1. Reserves are an appropriation of profits.
2. Reserves depend upon profit. In the absence of adequate profits, reserves can not be created.
3. Reserves are created to strengthen the liquid resources of the business enterprise.
4. Maintenance of reserves is not necessary because they are created as per financial prudence.
5. Reserves are recorded on the debit side of Profit and Loss Appropriation Account.
6. Reserves are always shown on the liabilities side.
7. Reserves can be invested outside business and known as Reserve Fund.
8. Reserves, other than capital reserves, can be distributed as profit.
9. Reserves reduce divisible profits.