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Reserve Vs. Provision

Rohit Khare (student) (111 Points)

15 November 2008

Dear All,

Can anybody explain to me as to what is the exact difference between Reserve and Provision? How it is reflected in the final accounts and what are the tax impacts about the two items???

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(Guest)

Both of them will be created out of profit and loss. But reserves belongs to owners or partners or shareholders as the case may be.

But the provision is generally used to settle a liability for outsiders

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ASHISH JAIN (STUDENT) (240 Points)
Replied 15 November 2008

Originally posted by :Rohit Khare
"	Dear All, Can anybody explain to me as to what is the exact difference between Reserve and Provision? How it is reflected in the final accounts and what are the tax impacts about the two items???	"

HI DEAR!

Resesrves and Provisions, both r created out of profit for future use and the amount is just guessed for the both, but the basic difference lies in that provisions are created for those expenses which r well known to be incurred but we dont know with how much amount.

e.g. Provision for Doutful Debts, here we know that there will be some bad debts but dont know how much.

On the other hand, reserves are created for those expenses which we dont know whether they will be incurred or not. We create them so that in future, if any expense ought to be incurred, then we shall not face any problem while meetig it.

e.g. Capital Reserve, here we always transfer the capital gains and with those transfers only they are made, but we dont know for which expenditure they will be used and whenever we'll come across any capital exp. we will use it.

Also, provisions are shown in P&L A/C as expense and in liablity side of Balance Sheet under Current Liablities, whereas Reserves are shown in liablities side of Balance Sheet under Reserves & Surplus and the profit which is t/frred to that reserve is shown as income in P&L A/C.

good bye!