Provision.....It is created to meet the known liability...Provision is charged against profit...It is created for a specific liability...It is created by debiting the profit and loss account...It cannot be used for payment of dividends...Creation of provision is compulsory. It is created even if there is no profit.Reserve....It is created to meet unknown liability...Reserve is appropriation of the profit...It is created for strengthening the financial position...Use for payment of dividend..It can be used for payment of dividends...Creation of reserve depends on the discretion of the management. It is created only when there is profit.

Provision and Reserve: Understanding the Difference

Introduction:
Both provisions and reserves are accounting terms used to set aside funds for future expenses or to account for potential losses. While they may seem similar, there are distinct differences between the two in terms of their purpose, accounting treatment, and usage.

Provisions:
A provision is an amount set aside from profits to cover a specific liability or potential loss that is uncertain but likely to occur. It is a liability that is recognized on the balance sheet when there is a present obligation, and it is probable that an outflow of resources will be required to settle the obligation. Provisions are made for expenses or losses that are expected to occur in the future and are based on estimates. Some common examples of provisions include:
- Provision for bad debts: A company may set aside an amount to cover potential losses from customers who may default on their payments.
- Provision for warranty expenses: Manufacturers often allocate funds to cover the potential costs of honoring warranties on their products.
- Provision for legal claims: Companies may create provisions to account for potential legal claims or disputes that might arise in the future.

Reserves:
Reserves, on the other hand, are amounts set aside from profits for general or unspecified purposes. They are not specifically earmarked for any known liability or expense but are created to strengthen the financial position of the company or to distribute dividends in the future. Reserves act as a buffer against unexpected losses or to finance future expansion plans. Unlike provisions, reserves are not recognized as liabilities on the balance sheet. Some common types of reserves include:
- General reserves: These are created to strengthen the financial position of the company and are not allocated for any specific purpose.
- Capital reserves: These reserves are created out of capital profits and cannot be distributed as dividends.
- Dividend reserves: Companies may set aside a portion of their profits as reserves to be used for the payment of future dividends.

Key Differences:
1. Purpose: Provisions are set aside for specific liabilities or potential losses, while reserves are created for general or unspecified purposes.
2. Recognition: Provisions are recognized as liabilities on the balance sheet, whereas reserves are not.
3. Accounting Treatment: Provisions are created based on estimates and are adjusted as more accurate information becomes available. Reserves are allocated at the discretion of the management.
4. Usage: Provisions are utilized to cover specific expenses or losses when they occur, while reserves are used to strengthen the financial position of the company or for future distribution of dividends.

In conclusion, provisions and reserves differ in terms of their purpose, recognition, accounting treatment, and usage. Provisions are specific and recognized as liabilities, while reserves are general and not recognized as liabilities. Both serve important functions in financial planning and help ensure the stability and growth of a company.