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Please explain the relationship between Reserve...

Please explain the relationship between Reserves and Provisions.

Please explain the relationship between Reserves and Provisions.

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Chiranjibi Chapagain Mar. 12, 2018

The relationship between reserves and provisions can be better understood with the help of following points:

  • Reserve is an appropriation of profit whereas provision is a charge against Profit.
  • Reserves are not intended to meet any liability, contingency or diminution in the value of assets. Provisions are made to provide for depreciation, renewal or a known liability or a disputed claim.
  • Reserves cannot be created unless there is a profit except revaluation reserve and capital subsidy. Provisions must be created whether or not there is profit.
  • Reserves are generally optional except in certain situations – Capital Redemption reserve, Debenture Redemption Reserve, etc. Provisions are not optional and have to be made as per generally accepted accounting principles.
  • Reserves are shown on the liability side. Provisions for depreciation and provision for doubtful debts are shown as deduction from respective assets. Provision for liability is shown on the liability side.

Please explain the relationship between Reserves and Provisions.

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