The provision means any amount set aside as a charge against profit to meet a loss, the amount of which cannot be determined with substantial accuracy. Reserve refers to amount set apart from profit and loss account to meet unforeseen contingencies.
The following are the difference between provision and reserve.
| Reserve |
Provision |
| 1. It is an appropriation of profit. |
1. It is a charge on profit. |
| 2. Created for meeting unknown liability. |
2. Created for meeting known liability |
| 3. It increases the amount of working capital. |
3. It is for meeting an anticipated loss or liability. |
| 4. It is available for distribution of dividend. |
4. It is not available for distribution of dividend. |
| 5. It is shown on the liability side of the balance sheet. |
5. It is usually shown as deduction from the assets concerned. |
| 6. It is not compulsory. |
6. It is compulsory. |
