Question

2. Write any three points of distinction between Reserve and Provision.
DI Solve the foll​

Answer 1

Answer:

Reserve = It is created to strengthen the financial position

2. It is appropriation of profit

3. it may be invested outside the business

provision

1. It is made to meet a known liability

2 it is charge against profit

3. it is not invested

Explanation:

You write it as difference I mention it according to difference

Answer 2

ANSWER :

❖ Three points of distinction between Reserve and Provision are :-

• [1] Meaning : The term Provision means the setting aside of an estimated amount to meet known liability or loss, the amount of which may not be exactly ascertained. On the other hand, Reserve means the amount set aside out of profit or other surpluses is to meet future uncertainties i.e., a reserve is meant for meeting any unknown liabilities or loss in the future.

• [2] Nature and Purpose : Provision is a charge against profit and it is created to meet a known liability or loss in the future. Whereas, Reserve is an appropriation of profit and it is created to meet an unknown liability or loss in the future.

• [3] Object : the object of making Provision is to show the true financial position of the business. While the object of Reserve is to strengthen the financial position of the business.

MORE TO KNOW :

❖ Provision :-

• ➯ Provision refers to an estimated amount keep aside by a business as a charge against profit to meet any known liability or loss in the future.

• ➯ According to Companies Act, 1956, the term Provision refers to any one of the following amounts : (1) The amount written of or retained by way of providing for depreciation, renewals or diminution of the value of assets, (2) The amount written by way of providing for any known liability the amount of which cannot be determined with substantial accuracy.

❖ Reserve :-

• ➯ Reserve refers to the amount set aside out of profit with the purpose to meet any unknown liability or loss in the future, i.e, future uncertainties. It is created through appropriation of profit.

• ➯ According to William Pickles, "Reserve means the amounts set aside out of profit or other surpluses, which are not earmarked in any way to meet any particular liability, known to exist on the date of the Balance Sheet".