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Provision Vs Reserve

PRAVIN ( M.Com ML MBA(Finance)) (352 Points)

12 September 2009

Dear Friends,

What is the difference between "Provision" and "Reserve"

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13 Replies

Deepak (student) (104 Points)
Replied 12 September 2009

provision is created when u know that there will be a liability /expense but not able to quantify it like provision for bad debt,provision for taxation,lwhere as a reserve is an appropriation of profit for some special or general purpose like general reserve

1 Like

CA Himanshu Bansal (Risk Manager) (2345 Points)
Replied 12 September 2009

Provision is created when it seems that a liability may occur in near future.eg, Provision for Bad debts etc etc.

Reserve is an amount set aside out of profit for some specific purpose.eg general reserve,

(Guest)

provision is a charge on profit whereas reserve is appropiation of profit

1 Like

Pratik More (CA FINAL CS ICWAI AMFI IRDA CGM M.COM ALL NCFM CRTFCT CPM CPA.) (604 Points)
Replied 12 September 2009

dekho mein kabhi bhi padhne bethta hu to hamesha baniya buddhi istemal karta hu mins marwadi budhhi, kyonki suddarshan aggarwal ji, d g8 name in a/c in whole of india, even a new born child being born wid his name, if he wil b a ca in future. provision kabhi fix nai hota he yeh to apna apna assumption hota jo chahe jitna le le, jabki co ko profit ho ya nai ho. reserve hamesha tab create kiya jatahe jab co ke pass sufficient profit ho yeh to humlogo ke liye hi banaya jata he ki co ko yadi ftr me koi bhi bada loss ho to woh make up jaya aur co band na ho like retained earnings. yeh to hamari sampati he bhaiyo. low language use karne ke liye maaf karna doto, kyonki yahi lang se mene itni degri hasil ki he.

1 Like

CA Rajat Jain (CA) (1677 Points)
Replied 12 September 2009

provisons is created for liablities and when there is a investment against a fund it is called reserves.

(Guest)

CA Kingsley (Audit Manager) (470 Points)
Replied 13 September 2009

Provision is created on basis of principle of conservatism concept. IF you expect a loss in future, you should charge against profit in current year itself. But a reserve is not a charge from profits. If profit is 200 of which 50 is transfered to reserve, it means, only Rs 150 can be paid as dividend. Balance rs 50 should be within company which may be in form of current assets or fixed assets. Look at this example:

Profits before tax 280

Less : Provision for tax 80 ( A liablity of Rs 80 is created here as provision for tax)

Profit after tax 200

Less : Transfer to reserve 50 (A liablity in form of general reserve is created for Rs 50)

Profit carried to P&L acc 150

So in next year, if tax is paid, then provision for tax will be debited. Thus provisons can become zero balance after the purpose of provision is utilized. But this reserve will always be in Credit balance only Rs 50 represented by Rs 50 on asset side of balance sheet in some form or other. The meaning of Rs 50 in credit balance is that, out of Rs 200, Rs 50 cant be drawn by share holders as a dividend. If reserve is not created, then profit carried to P&L will be Rs 200 the entire amount which can be used dr profit and loss acc*nt ,credit dividend payable account Rs 200. Due to provision, the above entry can be only restricted to Rs 150

(Guest)

provision is a charge against profit while reserve is a appropriation of profit........

CA Mohd Gouse (Chartered Accountant) (497 Points)
Replied 13 September 2009

CA Tushar Lakhanpal (CA) (416 Points)
Replied 13 September 2009

provision is a charge on profit whereas reserve is created out of profits...

CA Harish Suwalka (Chartered Accountant ( Bhilwara )) (4125 Points)
Replied 13 September 2009

provision is a charge against profit while reserve is a appropriation of profit

Ajay (Accountant) (72 Points)
Replied 14 September 2009

reserve is sum set out of profit & provision made on estimated bases

estimate on expected loss

reserve sum set of profit not meet ant liabilities.Reserve like gernal reserve utilse to writtoff loss

Pammi Srivastav (Assistant Finance Officer ) (84 Points)
Replied 15 September 2009

Then what abour Reserve for Doubtful Debt and Depreciation Reserve?. I think when u know the quantum or amount of loss u create the reserve and when u r not certain about the loss u make the provision. Provision and reserve r sometimes synonymous. We cannot say that provision is charge on profit and reserve is appropriation of profit. It should be seen in each context of the question.