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What is provision and reserve and how u treat in account
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Answer Posted / vinod k balasubramaniam
(1) Provision is made to meet known liability the
amount of which cannot be ascertained with substantial
accuracy.
Reserve is created to meet unexpected losses and
contingencies likely to arise in future.
(2) Provision can be used only for meeting the specific
purpose for which it has been made.
Reserve can be used for any purpose unless it is
created for a specific purpose.
(3) Provision is a charge on profits and reduces the
amount of net profits.
Reserves is an appropriation of profits and
reflects undistributed profits.
(4) Provision is to be made even if there are no
profits.
Reserve is created only when there are profits.
(5) Provision creation is compulsory.
Reserves creation is at the discretion of
management with the exception of debenture redemption
reserve for which the Companies Act has made a provison in
certain cases.
(6) Provision is meant for meeting expected losses and
cannot be used for dividend distribution.
Reserves is a part of owner’s funds and can be used
for distribution of dividends.
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