||It is a
possible loss so it is created by
debiting profit and loss account. It is
a charge against profit
||It is a portion of
profit earned by business. It is created
by debiting profit and loss
appropriation account. It is an
appropriation of profit.
loss account will not disclose true
profit/loss, unless provision is
||Profit and loss account
discloses true profit/loss, even if no
reserve is created.
created to meet specific loss or
liability. But the amount of loss or
liability cannot be determined exactly.
So the amount of provision is an
||It is meant for meeting
any unknown loss or liability. It is
generally created with a portion of
profit earned by business.
||It must be
created irrespective of whether there is
a profit or loss. In other words its
creation is obligatory.
||It cannot be created
unless there is a sufficient profit. Its
creation is the discretion of
management. In other words, it is not
loss is effected by its creation -
profit decreases or loss increases.
||It does not effect
profit or loss, since it is created
after ascertaining profit.
cannot be paid out of it.
||Dividend can be paid
out of it.
must be sufficient to meet the loss or
||Its amount is generally
determined by management on the basis of
the amount of profit earned.
increase working capital - it is
utilized for meeting the specific loss
||It increases working
capital and thereby strengthen the
financial position of the business
of the business cannot have any claim
over it, since it is created for meeting
a specific loss or liability.
||The owner can claim it,
since it is created out of profit.
||It is shown
on asset side of the balance sheet as
deduction from the concerned asset,
e.g., provision for doubtful debts is
shown as deduction from sundry debtors.
||It is shown on
liability side of the balance sheet as a
||It is used
for the specific purpose for which is
has been created.
||It can be used for the
must check its adequacy.
||Auditors are not
required to check adequacy.
In spite of the above
distinction between provision and reserve it may
be noted that both of them are created out of
the same source, i.e. revenue of the business.
Again, if there be any surplus provision after
meeting the liability or loss for which it was
created, such surplus provision is as good as
reserve. For example, a provision of $500 is
created in this year for doubtful debts. But
actual bad debts in the next year comes to $400
only leaving a surplus provision of $100 (500 -
400). This surplus will be credited to profit
and loss account. In other words, it becomes
payable to the owner of business like reserves.