Provisions and Reserves are financial terms related to a company’s liabilities and future obligations. Provisions are specific amounts set aside to cover known liabilities or expenses that are likely to occur, even though the exact amount or timing might be uncertain (e.g., provisions for bad debts). Reserves, however, are portions of profit allocated for future needs or contingencies, enhancing financial stability, but they are not tied to any specific liability.

What are Provisions?

Provisions are amounts set aside from a company's profits to cover anticipated future expenses or liabilities that are probable and can be estimated. These are recognized to account for future liabilities or losses, which are likely to occur but whose exact amount or timing is uncertain.

Examples of Provisions:

1. A provision for bad debts, where a company anticipates that some customers may not pay their debts.
2. A provision for warranties, estimating future costs related to product warranties.
3. A provision for taxes, such as income tax, which is not yet payable.

What are Reserves?

Reserves are part of a company's profits set aside to strengthen the financial position of the enterprise and for future contingencies. Reserves are retained earnings allocated for a specific purpose, and they may not necessarily be used to cover known liabilities. Instead, they serve as a safeguard for future uncertainties or for planned expenditures.

Examples of Reserves:

1. A general reserve, which is not designated for a specific purpose and can be used to cover any unexpected expenses or losses.
2. A legal reserve, which some jurisdictions require companies to maintain by law.
3. A dividend equalization reserve, used to stabilize dividend payments to shareholders over time.

Difference Between Provisions and Reserves

Basis	Provisions	Reserves
Purpose	To cover known and anticipated liabilities and losses.	To strengthen financial stability and prepare for future needs.
Nature	Charge against profits, as these are expenses which reduce the company’s income.	Appropriation of profits, meaning they are a portion of profits set aside after calculating net income.
Flexibility	Must be used for the specific purpose they are created for.	Generally more flexible, can be used as needed within the constraints of their designated purpose.
Requirement	Created based on anticipated expenses and liabilities.	Created based on strategic decisions by management or regulatory requirements.
Impact on Financial Statement	Reduce profits and are shown on the balance sheet as liabilities.	Do not reduce profits but represent a portion of equity not available for dividend distribution.
Legal Requirement	Often legally required, especially in regulated industries.	May or may not be legally required, depending on the reserve type and jurisdiction.
Examples	Provision for bad debts, warranty provisions, tax provisions.	General reserves, legal reserves, reserves for dividends.