Reserves: 1. It is created by debiting the profit and loss appropriation account. 2. It is created to meet an unknown liability, or to strengthen the financial position of the company or for equalization of dividends etc. 3. A reserve is created only when there is profit in the
business. 4. It can be distributed
among shareholders as dividend. 5. The reserve is created without taking into
consideration the actual amount required except in the case of redemption of
debentures when a definite sum is set aside. 6. Creation of reserve depends
upon the financial policy of the business and discretion of its management.7.
It is usually shown on the liability side of the balance sheet as it is not a
specific reserve.
Provisions: 1. It is created by
debiting the profit and loss account.2. It is created to meet a known liability
or a specific contingency, e.g. provision for bad and doubtful debts, or
provision for depreciation etc.3. A provision is created irrespective of
whether there is profit or loss in the business.4. It is not available for
distribution as dividend among
shareholders.5.
A provision is made for a definite amount and, therefore, a definite sum is set
aside every year to
meet the known contingency.6. Making
of a provision is a must to meet known liability or contingency.7. The
provision is generally shown on the assets side of the balance sheet.