Difference Between Reserves and Provisions

Written by True Tamplin, BSc, CEPF®

Reviewed by Subject Matter Experts

Updated on April 17, 2023

The key difference between reserves and provisions relates to their nature.

A provision is created in respect of a loss or expense that is most likely to happen in the near future.

For example, provisions for bad debts are created because a business knows out of experience that some of its debtors will fail to fully settle their dues.

A provision is created by making a debit to the profit and loss account (i.e., it represents an expense).

A reserve, on the other hand, is an appropriation of profit (i.e., it is created out of profits). Instead of crediting the entire profit to the partners' current accounts, a portion is transferred to the reserve account.

The aim is not to cover a potential loss but to allow the growth or expansion of the business.

The balance of a provisions account is shown in the balance sheet as a deduction from some asset's value (e.g., provisions for bad debts are deducted from the debtors account, and the net amount of this account is shown in the balance sheet).

A reserve, as such, is a part of the firm's equity. It is shown in the balance sheet on the liabilities side, alongside the partners' capital accounts.

Difference Between Reserves and Provisions FAQs

About the Author

True Tamplin, BSc, CEPF®

True Tamplin is a published author, public speaker, CEO of UpDigital, and founder of Finance Strategists.

True is a Certified Educator in Personal Finance (CEPF®), author of The Handy Financial Ratios Guide, a member of the Society for Advancing Business Editing and Writing, contributes to his financial education site, Finance Strategists, and has spoken to various financial communities such as the CFA Institute, as well as university students like his Alma mater, Biola University, where he received a bachelor of science in business and data analytics.

To learn more about True, visit his personal website or view his author profiles on Amazon, Nasdaq and Forbes.