09 January 2017
Concept of "Prudence" provide that a liability or its possibility must account for. When without analyzing result of the operation such liability is considered in books of account then it called provision. For example expenses of electricity, telephone, audit fees etc. irrespective the amount of such expenses is certain or not are provided for on 31st March or at the end of reporting period. No matter whether there is profit or surplus or cash is available or not. hence these called provision. Reserve has inherit concept of sufficiency or adequacy. It means when the operation generated profit or surplus of fund are available then it is appropriated or classified for meeting certain liabilities. This appropriation or classification called reserve. In addition to above Provision and Reserve both may be created or booked under the books of account. This may be required by law like Insurance, Electricity or any other entity. Reserve and Surplus may also be created if the formation documents like trust deed or memorandum or by laws required such creation. Under two cases the difference of being sufficient profit or surplus or cash is overlooked or ignored.
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