Book keeping - Differences between Reserves & Provisions

Most Important question  - 4 times asked so far

1984, 1987, 1988, 1995

Differences between

Reserves	Provisions
1. Appropriation of Profits.  Means not mandatory.	1. Charged against Profits.  Means Mandatory.
2. Reserves are only made when the business is profitable.	2. Provisions are made irrespective of profits earned or losses incurred by a business.
3. Debiting P&L Appropriation A/c	3. Debiting P & L A/c
4. Shown on Liabilities side of Balance Sheet	4. Shown on Liabilities side of Balance Sheet or Deduct from the Asset concerned.
5. Dividends can be paid out of Reserves.	5. Dividends cannot be paid out of Provisions.
6. Made to strengthen the financial position of a Business and meet unknown liabilities	6. Made to meet known liabilities such as doubtful debts.
7. Examples: General Reserve, Capital Reserve etc	7. Examples: Provision for Doubtful Debts, Provision for Depreciation, Provision for Tax, etc.,