Daffodil International University
Faculties and Departments => Business & Entrepreneurship => Topic started by: Repon on July 09, 2015, 01:13:39 PM
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What is the difference between reserve and provision?
In the U.S. the use of the word reserve has been discouraged for several decades. In its place, the accounting profession has recommended the use of words such as allowance, accumulated, or provision. For instance, many years ago the contra account to a plant asset may have been titled Depreciation Reserve. To some readers, that name implied that cash had been set aside to replace the asset. To better communicate reality, the accounting profession recommended a more descriptive title such as Accumulated Depreciation. Similarly, the contra account to Accounts Receivable may have been titled Reserve for Bad Debts. Again, that title could imply that money was set aside. To avoid misinterpretation, the accounting profession suggested Allowance for Bad Debts or Provision for Bad Debts.
The word provision might appear in the title of a contra account as we just noted. In addition, provision will occasionally appear in the title of an expense account, such as Provision for Income Taxes.
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Informative
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Nice information to know.
Thanks !
Asit Ghosh
Senior Lecturer, TE
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Thank you Kamruzzaman!!!
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Thank you for your comment@ Rony sir
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The following are the main differences between reserve and provision:
1. Mode Of Creation
Reserve is created against the charge of the profit and loss appropriation account. Provision is created against the charge of the profit and loss account.
2. Objective
Main objective of reserve is to strengthen the financial position and to meet future unknown losses and liabilities. Objective of provision is to meet known losses and liabilities the amount of which is not certain.
3. Accounting Treatment
Reserve is shown on debit side of profit and loss appropriation account and liabilities side of balance sheet. Provision is shown on debit side of profit and loss account and assets side of balance sheet as deduction from the concerned asset.
4. Relation With Profit
Reserve is created when there is enough profit in the business. Provision is created even if there is loss in the business.
5. Distribution
Reserve can be distributed to shareholders as dividend. Provision can not be distributed as dividend to shareholders.
6. Future Requirement
Reserve is created without considering the future requirement of the business. Provision is created by estimating the future requirement of the business.
7. Impact
Impact of reserve will be on financial position. Impact of provision will be on profit or loss of the business.
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Good to know.
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Good clarification.
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Thanks for sharing..