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SSC Financial and Cost Accounting P-1 QUESTION #9621
Question 1
Which of the following correctly distinguishes between a 'Provision' and a 'Reserve' in financial accounting?
  • Both are created at the discretion of management and may be used for any purpose
  • A provision is shown as a deduction from an asset or as a liability; a reserve is shown as part of equity✔️
  • A reserve reduces profit even if the entity has made a loss; a provision does not affect profit
  • Provisions are created only when the exact amount of a future obligation is known
Correct Answer Explanation
A provision is created out of necessity to show a true profit (charged to P&L) and is shown either as a deduction from the related asset (e.g., provision for bad debts) or as a current liability (e.g., accrued expenses). A reserve is an appropriation of profit, shown on the equity/liability side of the balance sheet, and is created at management's discretion only when profits exist.