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January 16, 2008

What is the difference between reserve and provision?

In the U.S. the use of the word reserve has been discouraged for several decades. In its place, the accounting profession has recommended the use of words such as allowance, accumulated, or provision. For instance, many years ago the contra account to a plant asset may have been titled Depreciation Reserve. To some readers, that name implied that cash had been set aside to replace the asset. To better communicate reality, the accounting profession recommended a more descriptive title such as Accumulated Depreciation. Similarly, the contra account to Accounts Receivable may have been titled Reserve for Bad Debts. Again, that title could imply that money was set aside. To avoid misinterpretation, the accounting profession suggested Allowance for Bad Debts or Provision for Bad Debts.

The word provision might appear in the title of a contra account as we just noted. In addition, provision will occasionally appear in the title of an expense account, such as Provision for Income Taxes.

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24 Responses to “What is the difference between reserve and provision?”

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    WHY WE DEDUCT PROVISION FOR DOUBTFUL DEBTS FROM DEBTOR IN BALANCE SHEET

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  11. Zarrar on October 1st, 2008 11:55 pm

    Remember that provision is a charge to the profit whilst a reserve is an appropriation to the profit. Reserves belongs to the owners equity side while provision can be on a liability side or on the assets side but as a negative asset

    Reserves are appropriations of profit namely when profits have been ascertained after deducting all expenses which includes provision and others. Reserves are residual earnings after all expenses and taxation which belongs to the owners namely the shareholders.

    Examples of capital reserves includes: share premium, capital redemption reserves, capital reserves arising on merger and acquisition, statutory reserves, asset revaluation reserve and exchange fluctuation reserves.
    Revenue reserve Examples are retained profits and general reserves

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  18. Mahender on January 22nd, 2009 10:03 am

    WHY WE DEDUCT PROVISION FOR DOUBTFUL DEBTS FROM DEBTOR IN BALANCE SHEET. WHY SHOULD NOT CREDIT TO DEBTORS ACCOUNT? COULD YOU PLEASE CARIFY ON THIS

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