Provisions and Reserves

 Provisions

The term PROVISION refers to providing certain estimated amount of funds retaining from the profits for the purpose to meeting the requirement of expected future liabilities when they fall due for payment.  Amounts provided as Provisions are estimated based on the past experiences, an example of which can be staff salaries.  Staff salaries are the expected liability that incurs at the end of each working cycle and falls due for payment at its set payment date.

In fact, uncertain of the actual amount, providing provisions helps with paying off the expected liabilities on time when they actually incur.  The provided amounts may likely to fall short or result in excess to actual amount when the actual amount is determined.  However, appropriate adjustments are made as they apply. 

Reserves

The term Reserves in accounting refers to amounts retained from the retained earnings for meeting the contingencies in case they occur.

Creating reserves for contingencies adds to business soundness and the affordability to meeting the contingencies when they occur all of a sudden out of expectations.  Thus such reserves provide businesses stability and adds to its continuity as a business concern.

Reserves and provisions are generally retained within the business.  As a result, it adds to working capital and provides the flexibility of conducting better business operations.

Retained amounts, when invested outside the business are called Reserve Funds such as Call Deposits. The prefix Fund generally denotes the presence of specific outside investments.

The distinguished characteristics of the provision and the reserves are: