Definition of Reserves

The Reserve is a fraction of retained earnings, which is kept

aside for any use in future. It is regarded as a part of
shareholder’s fund. The sum appropriated in the name of
reserves can be used for any of the given purposes:

 For purchasing an asset in future.

 To pay the dividends to shareholder consistently year by
year.
 For meeting out unexpected contingencies.
The reserves are mainly divided into following categories:

1. Capital Reserve
2. Revenue Reserve
 General Reserve

 Specific Reserve

Many accounting and business experts are of the view that it is

always considered good to save some money for an uncertain
future. That is why companies create reserves for conserving
money to meet out the future losses.

Definition of Provision
The Provision means to keep aside a particular sum of money to
cover up an anticipated liability which arises from the past
events. It is a recognition of an expected obligation, which will
result in the outflow of cash from the business. The amount of
the liability should be easily estimated by the entity to provide
for it.
The recognition is to be made to provide for a known liability or
decrease in the value of assets over time or a disputed claim
whose probability of occurrence is maximum.

If a provision is made in excess of the amount what is required,

then after paying off the liability, it needs to be written back to
the profit and loss account.

Examples:

 Provision for Bad Debts

 Provision for Depreciation
 Provision for Tax

Key Differences Between Provision and Reserve

The major differences between Provision and Reserve are as
under:

1. The Provision means to keep some money for a known

liability which is probable to arise after a certain time. The
Reserve is to retain some money from the profit to for any
particular future use.
2. The amount of provision cannot be used to pay off
dividends, but the amount of the reserves can be used for so.
3. The creation of a provision is compulsory against the
anticipated liability. Conversely, the creation of reserves is
voluntary except in the case of Capital Redemption Reserve
(CRR), and Debenture Redemption Reserve (DRR).
4. The use of provision is specific, i.e. it must be used for
which it is created. On the other hand, reserves can be used
otherwise.
5. Provisions are deducted from the concerned asset when it is
created against an asset while shown as a liability on the
balance sheet when it is created against liability. As opposed
to Reserves, which are shown on the liabilities side.
6. It is immaterial for the creation of provision, whether the
company earned the profit or not whereas the company must
earn the profit for the creation of reserves.