Depreciation, Provisions and Reserves — Account STD 11 Commerce — Question

Reserve: Reserves are the amounts set aside out of profits. It is an appropriation of profits or accumulated profits to strengthen the financial position of the business. Reserves are not set aside to meet a liability or depreciation in the value of assets but is set aside to meet known or unknown contingency that may arise in future. Examples are General Reserve, Reserve for Expansion, Reserve for Equalisation of Dividends, Reserve for Increased Costs of Replacement, etc.Provision:
Provision is an amount set aside, by charging it to the Profit and Loss Account or Statement of Profit and Loss (in case of companies), to provide for a known liability the amount of which cannot be determined with accuracy. It is charged in the Profit and Loss Account on the basis of best estimate. In other words, a provision is a charge against profit for the purpose of providing for any liability or loss. Provision for Depreciation, Provision for Doubtful Debts, Provision for Repairs and Provision for Tax are few examples of provisions. Provision differs from liability to the extent that provision is an estimated amount while liability is determined amount. For example, providing for wages of 50,000 pavable for the month of march is a liability. Thus, Provision is an estimated amount set aside to meet an uncertain loss or expense in future.