Join Your Exam WhatsApp group to get regular news, updates & study materials HOW TO JOIN

Karnataka class 12 commerce Accountancy Difference between provision and reserves

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

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: Provision is shown either (i) by way of deduction 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.

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

Karnataka class 12 commerce Accountancy Difference between provision and reserves

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

Basis of DifferenceProvisionReserve
Basic natureCharge against profit.Appropriation of profit
PurposeIt is created for a known liability or expense pertaining to current accounting period, the amount of which is not certainIt is made for strengthening the financial position of the business. Some reserves are also mandatory under the law.
Effect on taxable profits.It reduces taxable profits.It has no effect on taxable profit.
Presentation in balance sheetProvision is shown either (i) by way of deduction from the item on the asset side for which it is created, or (ii) on the liabilities side along with current liabilities.Reserve is shown on the liabilities side after capital.
Element of compulsionCreation 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.Creation of a reserve is generally at the discretion of the management. Reserve cannot be created unless there are profits. However, in certain cases law has stipulated for the creation of specific reserves such as Debenture Redemption Reserve.
Use for the payment of dividendProvision cannot be used for distribution as dividends.Reserve can be used for dividend distribution.

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

PROVISIONS-There are certain expenses/losses which are related to the current accounting period but amount of which is not known with certainty because they are not yet incurred. It is necessary to make provision for such items for ascertaining true net profit. For example, a trader who sells on credit basis knows that some of the debtors of the current period would default and would not pay or would pay only partially. It is necessary to take into account such an expected loss while calculating true and fair profit/loss according to the principle of Prudence or Conservatism. Therefore, the trader creates a Provision for Doubtful Debts to take care of expected loss at the time of realisation from debtors. In a similar way, Provision for repairs and renewals may also be created to provide for expected repair and renewal of the fixed assets. Examples of provisions are : 

  • Provision for depreciation;
  • Provision for bad and doubtful debts;
  • Provision for taxation;
  • Provision for discount on debtors; and
  • Provision for repairs and renewals.

It must be noted that the amount of provision for expense and loss is a charge against the revenue of the current period. Creation of provision ensures proper matching of revenue and expenses and hence the calculation of true profits. Provisions are created by debiting the profit and loss account. In the balance sheet, the amount of provision may be shown either:

  • By way of deduction from the concerned asset on the assets side. For example, provision for doubtful debts is shown as deduction from the amount of sundry debtors and provision for depreciation as a deduction from the concerned fixed assets;
  • On the liabilities side of the balance sheet along with current liabilities, for example provision for taxes and provision for repairs and renewals.

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

RESERVES:A part of the profit may be set aside and retained in the business to provide for certain future needs like growth and expansion or to meet future contingencies such as workmen compensation. Unlike provisions, reserves are the appropriations of profit to strengthen the financial position of the business. Reserve is not a charge against profit as it is not meant to cover any known liability or expected loss in future. However, retention of profits in the form of reserves reduces the amount of profits available for distribution among the owners of the business. It is shown under the head Reserves and Surpluses on the liabilities side of the balance sheet after capital.Examples of reserves are:

  • General reserve;
  • Workmen compensation fund;
  • Investment fluctuation fund;
  • Capital reserve;
  • Dividend equalization reserve;
  • Reserve for redemption of debenture.

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

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: Provision is shown either (i) by way of deduction 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.

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

  • Karnataka class 12 commerce Accountancy CH1 DEPRECIATION PROVISIONS AND RESERVES
  • Karnataka class 12 commerce Accountancy Meaning of depreciation
  • Karnataka class 12 commerce Accountancy Features of depreciation
  • Karnataka class 12 commerce Accountancy Causes for depreciation
  • Karnataka class 12 commerce Accountancy Need for charging depreciation

Karnataka class 12 commerce Accountancy Difference between provision and reserves:

CAKART provides India’s top class XI commerce  faculty video classes – online Classes – at very cost effective rates. Get class XI commerce Video classes from CAKART.in to do a great preparation for your exam.

Watch class XI commerce sample video lectures Visit cakart.in
Watch class XI commerce Sample Books Visit cakart.in
Watch class XI commerce free downloads Visit cakart.in

For any questions chat with us by clicking on the chat button below or give a missed call at 9980100288

Leave a comment

Your email address will not be published. Required fields are marked *