6 Difference Between Provision and Reserves

Provision and Reserves are the savings which is done for the future known and unknown liabilities. Bot provision and Reserves are helpful to make business safe in future. Provision are the saving which is done for the known liabilities. Simply means this saving is done for that type loss or expenses which fix that they occur in future. While reserves are the savings which is saved from the profit for unknown liabilities. This saving is used for any unknown expenses or liabilities which arise in future.

Provision and Reserves are used very much in the business line. Both these are responsible to save the business in future. So, it’s very important to understand the concept of provision and Reserves. In this article we will discuss in detail and the difference between provision and Reserves.

Provision vs Reserves

Sr. No.	Provision	Reserves
1	Money which kept aside for the known liabilities and expenses of the business which will definitely arise in future	Money which kept aside for the unknown liabilities and expenses of future.
2	Money is extracted from the revenue of the business	The amount which is extracted from the profit.
3	Compulsory	Are made when profit occurs.
4	Dividend is not paid from provision	Dividend is paid from the reserves
5	Used within the business or organisation	May be used outside the business or organisation.
6	Charge against profit	Appropriation of profit

Provision

It is the money which is saved by an organisation for the future known liabilities and expenses. This money is saved from the revenue of the organisation. The future liabilities and expenses are tax, decrease in the value of the assets, money stuck with the vendors. This amount of is not given as dividends. Saving as provision is compulsory for any organisation for the future liabilities. Provision money is only use within the organisation or business.

Provision is made as per the need and financial year. Provision is save before the profit. Means provision is made charge against profit.

Example

1. Provision for depreciation
2. Provision for tax
3. Provision for bad debts.

Reserves

This is the amount of money which is kept aside from the profit by an organization of business to use for the unknown liabilities and the expenses. This amount can be used within or outside the business or organisation. This amount may be used for the purchasing of assets in future. For unknown liabilities, to pay dividends. Reserves are saved from the profit of the company. Simply means if organisation has profit in that case reserves are made.

Types of the reserve

1. Capital

   reserve

Capital reserve is money generated from the capitals like land selling etc. This money is not distributed among shareholders. Simply means this money is not generated from the core operation of the business.

2. Revenue reserve

              This is the money which is generated from the core operation or work of the company.

Main differencee between provision and Reserves

1. Provision is the money which kept aside for the known liabilities and expenses of the business which will definitely arise in future. Reserves is the money which kept aside for the unknown liabilities and expenses of future.
2. Provision money is extracted from the revenue of the business. While reserves are the amount which is extracted from the profit.
3. Provision is compulsory. While reserves are made when profit occurs.
4. Dividend is not paid from the provision. Dividend is paid from the reserves.
5. Provision is used within the business or organisation. While reserves may be used outside the business or organisation.
6. Provision is charge against profit. Reserves is appropriation of profit.

Conclusion

Both provision and Reserves are the saviour of the business and the organisation. Provision is made for the future known liabilities like tax, bad debts etc. While the reserve is made for the unknown liabilities of the future. In simple words reserves is the amount for the bad times. Because problems and the liabilities remains hidden until it arises. So this amount is used to solve uncertain problem and liabilities. So provision and Reserves are the backbones of the business and organisations.

This is all about the provision and Reserves. We hope this will clear your doubts about the provision and Reserves. If you have any confusion, please feel free to comment on us. For more interesting topics like this please go through our website.