Ad Free CAclubindia and Daily Updates on your Mobile. Subscribe Now!

Provision And Reserves

Shashank (Article) (65 Points)

26 February 2009

What is the difference between a provision and a reserve?

Reply
Follow
Share

8 Replies

Krunal Raichura (Financial Advisory) (2134 Points)
Replied 26 February 2009

In accounting sense, provision is an amount attributed towards a possible liability resulting in cash outflows for the firm whereas reserve is a an amount kept aside for a specific purpose (if no purpose then profits are transferred to general or capital reserves as the case maybe).

Reserves are created out of profits, whereas provisions are made as soon as a possibilty of liability is determined irrespective of profits or loss.

The choice to create / not to create reserve lies with the Management which is not the case with provisions.

Reserves are shown on liability side whereas provisions dont appear on balance sheet.

Upgrade to CAclubindia Pro. Subscribe Now!

C.A. M.Com. Suhas A. Nagpure (CA) (1175 Points)
Replied 26 February 2009

Nice Explanation.

ANIRBAN BANERJEE (Student) (298 Points)
Replied 26 February 2009

profit is not transferred to capital reserve..it can be transferred to capital a/c in case of prop ship or partnership businesses

CA SUDIPTA SINHA (Commerce Coaching- Accounts Cost FM) (735 Points)
Replied 26 February 2009

good reply MR. Anirban......u have learnt at last..

Santhosh Poojary (SIEMPRE AHÍ PARA TI) (15607 Points)
Replied 26 February 2009

thanks friends................................................................................................................................................

Upgrade to CAclubindia Pro. Subscribe Now!

Shubhankar Limaye (B.Com.) (174 Points)
Replied 28 February 2009

Provisions are a charge on profits whereas reserves are a result of appropriation of profits. More often than not, the provisions are liabilities towards third parties but reserves are owner's equity, except in few cases like reserves created for redemption of debentures etc.

Further, under taxation laws deduction can generally be availed in respect of provisions that have been charged to current year's profit. Deduction in respect of amounts appropriated towards reserves cannot be availed except in few cases.