Difference Between Reserve And Provision
The main dissimilarities or difference between reserve and provision can be pointed out as follows:
1. Meaning
Reserve: It is a part of the profit retained to meet future contingencies.
Provision: It is a sum of amount charged against profit to meet future loss and liability.
2. Objective
Reserve: To meet the future need of fund and to improve the financial position of the business firm.
Provision: To cover the uncertain loss and liabilities.
3. Accounting Treatment
Reserve: It is recorded as the debit item of profit and loss appropriation account and liabilities item of balance sheet.
Provision: It is recorded as the debit item of profit and loss account and assets item of balance sheet.
4. Profit Requirement
Reserve: It requires adequate profit to create reserve.
Provision: It does not require profit and can be created in case of loss also.
5. Dividend Payment
Reserve: Reserve can be distributed as dividend.
Provision: It cannot be used for the purpose of distribution of dividend.
6. Effect
Reserve: It affects the financial position of the business firm.
Provision: It affects the profit and loss of the business firm.
Also Read:
Also Read:
7. Investment
Reserve: Reserve can be used for investment purpose.
Provision: Provision cannot be used as investment.
Reserve Vs Provision (Comparison Chart)
I hope this post is helpful to understand the difference between reserve and provision and to make comparison between them.
Reserve Vs Provision (Comparison Chart)
Basis For Difference
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Reserve
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Provision
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Introduction
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Portion of profit retained for future use
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Some amount of money charged against profit to fulfill future liabilities
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Purpose/Objective
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To meet future financial needs
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To cover future loss and liabilities
|
Accounting Treatment
|
Posted in the debit side of profit and loss appropriation account
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Posted in the debit side of profit and loss account
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Profit Requirement
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Yes
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No
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Used As Dividend
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Can be used as dividend
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No
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Effect
|
Financial position
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Profit and loss
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Used As Investment
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Yes
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No
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I hope this post is helpful to understand the difference between reserve and provision and to make comparison between them.
