The Difference Between Provision and Reserve
Money is the backbone of institutions, and a major reason for their survival and continuity. Institutions need funds to establish projects, purchase various assets, pay workers’ wages and follow up on other obligations incurred by the institution, so that the financial management in the institution aims to control costs without affecting the quality of the outputs produced by that institution. Cost control is either through the rationalization of expenditures or the optimal utilization of resources, and also leads to achieving the goals of financial management and increasing the profits and wealth of the owners in the institution.
There are many sources of financing in the institution, including short-term such as commercial credit and bank credit, and long-term such as stocks, bonds and loans, or through retained earnings, which is the funds that the institution or company withholds within it in order to expand and increase the volume of its business.
Provision and reserve
Through the title of the article that raises the difference between the provision and the reserve, we must distinguish between defining each of them. First, I want to define the provision, which is an amount that is taken from the revenues to meet the loss, such as depreciation, or in other words, it is an expense that is taken from the company’s revenues, and the profits are not distributed as is customary. Accordingly, these provisions are taken to face any potential liabilities of an unspecified amount, such as: judicial claims, a provision for declining investment prices, a provision for declining inventory value, renewal of fixed assets or a decrease in the value of assets.
As for the reserve, it is defined as an amount of money that is taken from the net profits to achieve certain gains and goals in that company, so the company decides to retain part of the profits as shareholders’ profits to invest it in a specific purpose, and it must be stipulated in the company’s articles of association, or based on a proposal from Board of Directors and its purpose is to consolidate the financial position of the company; To increase the rights of shareholders and thus increase the confidence of creditors, and examples of reserves are the legal reserve, the reserve for high prices of fixed assets, and the reserve for settlements decided by the company’s management in order to provide the necessary financing in the future.
The difference between provision and reserve
*. The allocation is money that is taken from the revenue, while the reserve is a part of the profits that is kept for a purpose.
*. The provision results from a shortage that either occurred or is likely to occur in the future, while the reserve results from profits taking part of it for certain possible goals.
*. Provisions are made according to an administrative or financial view that needs them, that is, they are among the current liabilities. As for the reserves, they are made up of owners’ rights or a prerequisite for binding legal texts to form them.
*. The allotment is IBM or load on earnings, the precaution is profit distribution.
*. The provision is recorded in the income statement, while the reserve is recorded in the distributions statement.