Provisions Vs reserves

Provision

Any amount written off by way of providing depreciation, reductions & alteration is called as provision.

For instance: Provision for depreciation, provision for bad debts, provision for taxation.

Provision is charged to Profit & loss account statement.

The effect of provision results in the reducing the Net profit.

Creation of Provision is Mandatory.

The objective of the provision is to meet the known losses.

Reserves

Any appropriation from the Net profit is called as Reserves.

The appropriation of reserve is possible when there is a net profit available.

Reserves are charged to the P&L appropriation A/C.

Reserves are created to meet any uncertainty or unknown loss in the future or strengthening the financial position of the company.