Provision & Reserve

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Provision & Reserve

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Answer Solution: Provision and Reserve: Provision means  "any amount written off or retained by way of providing for depreciation, renewal or diminution in value of assets, or  retained by way of providing for any known liability of which the amount cannot be determined with substantial accuracy".- Provision is a present liability which by its nature requires a significant amount of estimation. The following are examples of amount retained in the business out of earning for different purposes that are described as provisions. 1. Amount provided for meeting claims/liabilities which are admissible in principle but the amount whereof has not been ascertained. 2. Amount provided for payment of taxes still to be assessed. 3. Amount set aside for writing off bad debts or for discounts.  The term 'reserve' is not defined in Part-III of Schedule III except negatively in the sense that profit retained in the business not having any of the attributes of a 'provision' is to be treated as a reserve.  Also provisions in excess of the amount considered necessary for the purposes these were originally made, are to be considered as reserves. It is thus evident that provisions are a charge against profits, while reserve is an appropriation of profits.  Reserve are accumulated profits hence part of owners equity, provision are in the nature of liability due to outsiders.  Provision will be debited to P&L A/c and reserve to P&L appropriation A/c when created.

Provision & Reserve

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