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Basis
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Reserve
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Provision
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1.
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Nature
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It is an appropriation of profit.
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It is a charge against Profit.
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2.
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Purpose
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It is created to strengthen the financial position and to meet unforeseen liability or losses.
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It is made to meet known liability or contingency, when amount is not determind.
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3.
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Effect on profit
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It is debited to the profit and Loss Appropriation Account. Hence, Profit is not affected.
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It is debited to the profit and Loss Account. Hence, profit is reduced.
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4.
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Investment
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It may be invested outside the business.
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It is not invested.
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5.
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Distribution
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Unutilised part can be distributed as dividend. It reduces divisible profit.
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It cannot be used for distribution as profit/ dividend. It reduces net profits.
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6.
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Compulsion/ Prudence
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It is created out of profits as a matter of prudence and due to legal requirements.
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It is made because of accounting principles (prudence).
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7.
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Presentation
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A reserve is shown on the liabilities side of Balance Sheet under the head 'Reserves and Surplus'.
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It is shown either as a liability under the head 'Current Liabilities' or as deduction from the asset.
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S.No
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₹
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i
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Machinery purchased
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40,000
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ii
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Machinery sold
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10,000
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iii
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Machinery purchased
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8,000
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iv
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Machinery discarded
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14,000
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v
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Depreciation on machinery
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1,000
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