Business Management Interview Question:

What is the difference between PROVISION & RESERVE?

Submitted by: Administrator

PROVISION : Provision is a charge to P&L a/c.
RESERVE : Reserve is an appropriation of profit.
provision : it is because of legal necessity.
reserve : it is a matter of finavial prudence.
provision : creation of provision decreases the funds of
the business.
reserve : creation of reserve increases the working capital
of the business.
provision : can be made irrespective of profit / loss
reserve : cannot be made when there is loss.
provision : are made against expected losses.
reserve :safe guard against unexpected losses and there by
to strengthen the financial position of the company
Submitted by: Administrator

PROVISION, generally, is to prepare in advance for an event that is projected to take place in the future. In accounting, it is an amount charged against profits for a specific liability (for example: bad debts, depreciation or taxes). A liability may be known, but the amount is often uncertain. This uncertainty may lead to an adjustment in a later income statement once the final amount of the liability is ascertained.
RESERVE is an accounting entry that properly reflects contingent liabilities.CONTINGENT LIABILITY is: (a) A possible obligation from past events that will be confirmed only by the occurrence or non-occurrence of one or more uncertain future events not wholly within the control of the enterprise;
Submitted by: Shobha