What is provision and reserve and how u treat in account
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Answer Posted / prasanna11149@yahoo.co.in
Reserve is the part of the capital of a company, other than
the share capital, largely arising from retained profit or
from the issue of share capital at more than its nominal
value. Reserves are distinguished from Provision in that
for the latter there is a known diminution in value of an
asset or a known liability, whereas reserves are surpluses
not yet distributed and, in some cases (e.g., share premium
account or capital redemption reserve), not distributable.
The directors of a company may choose to earmark part of
these funds for a special purpose.(e.g., a Reserve for
obsolescence of plant). However, reserves should not be
seen as specific sums of money put aside for special
purposes as they are represented by the general net assets
of the company. Reserves are subdivided into Retained
earnings(revenue reserves), which are available to be
distributed to the shareholders by way of dividends, and
capital reserves, which for various reasons are not
distributable as dividends, although they may be converted
into permanent share capital by way of a bonus issue.
Provision is an amount set aside out of profits in the
accounts of an organisation for a known liability(even
though the specific amount might not be known) or for the
diminution in value of an asset. Common examples include
Provision for Bad debts, Provision for depreciation and
also provision for accrued liabilities.
Reserve and Provision may be shown on the Liabilities side
of the Balance sheet or it may be deducted from the
concerned asset on the assets side of the balance sheet
(like Provision for bad debts deducted from Debtors)
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