What is the difference between reserve and provision?

  PROVISION V.S. RESERVE

 In the U.S. the use of the word reserve has been discouraged for several decades. In its place, the accounting profession has recommended the use of words such as allowance, accumulated, or provision. 

For instance, many years ago the contra account to a plant asset may have been titled Depreciation Reserve, To some readers, that name implied that cash had been set aside to replace the asset. 

To better communicate reality, the accounting profession recommended a more descriptive title such as Accumulated Depreciation. Similarly, the contra account to Accounts Receivable may have been titled Reserve for Bad Debts. 

Again, that title could imply that money was set aside. To avoid misinterpretation, the accounting profession suggested Allowance for Bad Debts or Provision for Bad Debts.

The word provision might appear in the title of a contra account as we just noted. In addition, provision will occasionally appear in the title of an expense account, such as Provision for Income Taxes.

Let us look at some of the key differences between Reserve and Provision in the table below (Reference: Byjus.com)

Reserve	Provision
Definition
The portion of profit kept aside for unforeseen obligations of a business	A portion of money from the business set aside for meeting known liabilities or expenses
Method of Creation
Created by debiting Profit and Loss appropriation account	Created by debiting Profit and Loss Account
Purpose
It provides capital for running the business and safeguards against expenses from unforeseen contingencies	It secures business from expenses arising from known liabilities
Allocation
Presence of profit is required for allocation of reserve.	Presence of profit not necessary for allocation
Dividend Payment
Paid from reserves	Cannot be paid
Impact on Profit
Reduces net profit of the organisation	Reduces profits for dividend distribution
Appears in
Always shown on the liability side	Appears as a deduction from the concerned asset, in case of an asset,  in case of liabilities, it is shown in the liabilities side
Utilisation
Can be used for any given purpose	Needs to be used for the specific purpose it is allocated for