Differentiate between Reserve and Provision.

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Accepted Answer

BasisProvisionReserveBasic NatureA provision is a charge against profit. It is deducted from gross profitReserve is an appropriation of profit. It is created after net profitPurposeIt is made to for known liabilities or expenses pertaining to current accounting period.It is created for strengthening the financial position of the businessPresentation in balance sheetIt is shown eitheri) By deduction from the item on the assets side for which it is created.ii) On the liability side along with current liabilitiesIt is shown on the liability side after capitalEffect on taxable profitsIt is deducted before calculating taxable profits.It is created after tax.Element of compulsionIt is necessary to ascertain true and fair P&L It is at the discretion of the management.Use for the payment of dividendIt cannot be used for dividend distributionIt can be used for dividend distribution

Basis	Provision	Reserve
Basic Nature	A provision is a charge against profit. It is deducted from gross profit	Reserve is an appropriation of profit. It is created after net profit
Purpose	It is made to for known liabilities or expenses pertaining to current accounting period.	It is created for strengthening the financial position of the business
Presentation in balance sheet	It is shown either i) By deduction from the item on the assets side for which it is created. ii) On the liability side along with current liabilities	It is shown on the liability side after capital
Effect on taxable profits	It is deducted before calculating taxable profits.	It is created after tax.
Element of compulsion	It is necessary to ascertain true and fair P&L	It is at the discretion of the management.
Use for the payment of dividend	It cannot be used for dividend distribution	It can be used for dividend distribution

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