Editing Content :: Admin Scraper

Chapter

Content type

Position

Value

Depreciation, Provisions and Reserves 265 7.12.1 Difference between Reserve and Provision The points of difference between reserve and provision are explained below: 1. Basic nature : A provision is a charge against profit whereas reserve is an appropriation of profit. Hence, net profit cannot be calculated unless all provisions have been debited to profit and loss account, while a reserve is created after the calculation of net profit. 2. Purpose : Provision is made for a known liability or expense pertaining to current accounting period, the amount of which is not certain. On the other hand reserve is created for strengthening the financial position of the business. Some reserves are also mandatory under the law. 3. Presentation in balance sheet:Provisionisshowneither(i)bywayofdeduction from the item on the asset side for which it is created, or (ii) on the liabilities side along with current liabilities. On the other hand, reserve is shown on the liabilities side after capital. 4. Effect on taxable profits : Provision is deducted before calculating taxable profits. Hence, it reduces taxable profits. A reserve is created from profit after tax and therefore it has no effect on taxable profit. 5. Element of compulsion : Creation of provision is necessary to ascertain true and fair profit or loss in compliance with ‘Prudence’ or ‘Conservatism’ concept. It has to be made even if there are no profits. Whereas creation of a reserve is generally at the discretion of the management. However, in certain cases law has stipulated for the creation of specific reserves such as Debenture Redemption Reserve. Reserve cannot be created unless there are profits. 6. Use for the payment of dividend : Provision cannot be used for distribution as dividends while general reserve can be used for dividend distribution. Basis of Difference Provision Reserve 1. Basic nature Charge against profit. Appropriation of profit. 2. Purpose It is created for a known It is made for strengthening liability or expense pertaining the financial position of to current accounting period, the business.Some reserves the amount of which is not are also mandatory under law. certain. 3. Effect on taxable It reduces taxable profits. It has no effect on taxable profits. profit. 4. Presentations in It is shown either (i) by way It is shown on the liabilities. Balance sheet of deduction from the item on side after capital amount. the asset side for which it is created, or (ii) In the liabilities side along with current liabilities. Reprint 2026-27