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what is the difference between provision for bad debts and
reserve for bad debts?
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Answer Posted / amit kapoor
Reserves
1. It is created by debiting the profit and loss
appropriation account.
2. It is created to meet an unknown liability, or to
strengthen the financial position of the company or for
equalization of dividends etc.
3. A reserve is created only when there is profit in the
business.
4. It can be distributed among shareholders as dividend.
5. The reserve is created without taking into consideration
the actual amount required except in the case of redemption
of debentures when a definite sum is set aside.
6. Creation of reserve depends upon the financial policy of
the business and discretion of its management.
7. It is usually shown on the liability side of the balance
sheet as it is not a specific reserve.
Provisions
1. It is created by debiting the profit and loss account.
2. It is created to meet a known liability or a specific
contingency, e.g.. provision for bad and doubtful debts, or
provision for depreciation etc.
3. A provision is created irrespective of whether there is
profit or loss in the business.
4. It is not available for distribution as dividend among
shareholders.
5. A provision is made for a definite amount and,
therefore, a definite sum is set aside every year to meet
the known contingency.
6. Making of a provision is a must to meet known liability
or contingency.
7. The provision is generally shown on the assets side of
the balance sheet.
| Is This Answer Correct ? | 31 Yes | 7 No |
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