AccountsISC Class 11 · Provisions and Reserves

Provisions and How They Differ from Reserves: ISC Class 11 Accounts

Updated 17 October 2026 · Fact-checked

A provision is an amount set aside out of profit to meet a known liability or loss whose exact amount is uncertain (doubtful debts, repairs, depreciation, discount on debtors). It is a charge against profit, so it is debited to the Profit and Loss Account before the profit is found. A reserve is a part of profit retained after the profit has been found, to strengthen the business or for a general purpose.

Notice that a provision is charged before net profit is found, even in a loss, while a reserve is taken out of profit afterwards.

Illustration drawn for QuestionBuddy.

Understand Provisions: Meaning, Examples and the Difference from Reserves

Provision. An amount charged against profit for a known liability or an expected loss that cannot be determined accurately. Examples: provision for doubtful debts, provision for discount on debtors, provision for depreciation, provision for repairs and renewals, provision for taxation.

Importance. It matches the expense with the period in which the loss arises, shows a true and fair profit, follows prudence, and keeps the asset or liability at a realistic figure.

Entry. Profit and Loss A/c Dr, To Provision A/c. A provision is not an appropriation; the profit is struck after charging it. In the balance sheet: for doubtful debts and discount on debtors, deduct from debtors; for depreciation, deduct from the asset; for taxation or repairs, show as a liability (current).

Features.

Charged against profit; must be made whether or not there is profit.
For a specific purpose.
Reduces profit; it is not available for distribution to the owner.
Not a free fund.

Provision vs reserve.

Point	Provision	Reserve
Purpose	Known liability or loss of uncertain amount	Strengthen finances, general or specific need
Charge	Against profit (before profit)	Appropriation of profit (after profit)
Compulsion	Compulsory, even in loss	Created only if profit exists
Distribution	Cannot be distributed	Can be distributed (if free)
Balance sheet	Deducted from assets or shown as a liability	Shown on liabilities side with capital

Provision vs liability. A liability is known in amount; a provision is an estimate for a known obligation. Hence a provision is set up when the liability exists but the amount is estimated.

Provision for repairs and renewals. Charged to P&L each year, to be used when the repair happens; on spending, the provision account is debited.

Provisions: Meaning, Examples and the Difference from Reserves: key facts

Provision entry: Profit and Loss A/c Dr | To Provision A/c; Charged before profit.
Provision for doubtful debts: Provision = Rate x (Debtors - Bad debts) | Charge = New - Old provision; Net change charged.
Repairs provision: Annual charge = Estimated repairs / Years | Provision balance used when repairs are paid; Equal yearly charge.

How to answer Provisions: Meaning, Examples and the Difference from Reserves questions

Decide whether the amount is a provision (before profit) or a reserve (after profit).

1Ask: is there a known liability or loss with an uncertain amount?
2If yes, charge it to P&L before finding profit.
3If it is a free set-aside from profit, treat it as a reserve after profit.
4Show provisions as deductions from assets or as liabilities in the balance sheet.

Provisions: Meaning, Examples and the Difference from Reserves in real life

The idea, met in an everyday situation. Answer the question in your own words, then compare with the model answer. The one-line hook is what to remember.

Provision vs reserve

Suppose a mobile shop expects Rs 3,000 of credit sales to turn bad, and also decides to keep Rs 20,000 of profit aside for a new showroom.

Which is a provision and which a reserve?

Try it first, then show the solutionSolution

The expected bad debts are a loss of the year with an uncertain amount: provision, charged to profit.
The Rs 20,000 set aside for a showroom is a part of profit retained: reserve.

Answer: Provision for doubtful debts Rs 3,000; reserve Rs 20,000.

Memory hook: Provision before profit, reserve after profit.

Tricks to remember Provisions: Meaning, Examples and the Difference from Reserves

Short memory aids. Say each one aloud once, then use it on a question the same day.

Before and After
Provision is charged before profit; reserve is made after profit.
Use it when: Difference.
Provision means must
A provision is compulsory; a reserve is a choice.
Use it when: Nature.
Debtors minus
Doubtful debts provision is deducted from debtors.
Use it when: Balance sheet.

Provisions: Meaning, Examples and the Difference from Reserves: solved examples

Ordered from board level to HOTS. Try each one before you open the solution.

Example 1: Nature · 1 mark · MCQBoard level

A provision is:
(a) an appropriation of profit (b) a charge against profit (c) a free fund (d) a capital receipt

Try it first, then show the solutionSolution

Provision is charged against profit before the profit is found.

Answer: (b) a charge against profit

Example 2: Differences · 4 marks · Short answerBoard level

State four differences between a provision and a reserve. (4 marks)

Try it first, then show the solutionSolution

Charge or appropriation.
Compulsory or optional.
Purpose.
Distribution.

Answer: A provision is a charge against profit, compulsory, for a known liability or loss, and not distributable. A reserve is an appropriation of profit, optional, for general strengthening, and can be distributed.

Example 3: Provision for repairs · 6 marks · Long answerHarder board level

A firm expects a major overhaul costing Rs 60,000 after 3 years. It provides equally each year. In the third year, repairs actually cost Rs 63,500 on the machinery. Show the Provision for Repairs account over 3 years and the treatment of the extra. (6 marks)

Try it first, then show the solutionSolution

Annual charge = 60,000 / 3 = 20,000. Balance: 20,000, 40,000, 60,000.
Third year: repairs 63,500 are debited to the provision account, which has a credit balance of 60,000.
The excess 3,500 is transferred to Profit and Loss as additional charge.

Answer: Provision charged Rs 20,000 each year (total Rs 60,000); the repair cost of Rs 63,500 is debited to the provision account; the excess Rs 3,500 goes to the Profit and Loss Account.

Example 4: Doubtful debts over two years · 6 marks · Long answerHarder board level

Year 1: debtors Rs 1,20,000; bad debts Rs 5,000 still to be written off; provision 5%. Year 2: debtors Rs 1,50,000 after writing off further bad debts of Rs 4,000 during the year; provision 5% on Rs 1,50,000. Find the Profit and Loss charge each year for bad debts and provision. (6 marks)

Try it first, then show the solutionSolution

Year 1: good debtors = 1,15,000; provision = 5,750. Charge = 5,000 + 5,750 = 10,750.
Year 2: new provision = 7,500; old provision = 5,750. Charge for provision = 1,750.
Bad debts Rs 4,000 plus 1,750 = Rs 5,750 total charge.

Answer: Year 1 charge Rs 10,750; year 2 charge Rs 5,750.

Example 5: Judging the creation · 4 marks · Short answerHOTS / competency

A trader made Rs 40,000 profit and creates a "provision" of Rs 15,000 for a possible future expansion. Evaluate this statement using the definition of provision, and give the correct treatment. Show what the profit would have been if it were a true provision. (4 marks)

Try it first, then show the solutionSolution

Expansion is not a known liability or loss; it is a plan, so it is not a provision.
It is a reserve, created after profit by appropriation.
If it were a true provision (a charge), profit would be 40,000 - 15,000 = 25,000.

Answer: It is a reserve, not a provision. As a reserve, profit stays Rs 40,000 and Rs 15,000 is appropriated; as a provision, profit would be Rs 25,000.

Where students lose marks in Provisions: Meaning, Examples and the Difference from Reserves

The slips examiners see most often, and what to write instead.

Mistake: Calling a reserve a provision
Both are set-asides.
Wrong working
Reserve is charged before profit
Right working
Reserve is made after profit
Do this: Before/after test.
Usually costs: 1-2 marks.
Mistake: Charging the full new provision
Ignoring the old provision.
Wrong working
7,500 charged
Right working
7,500 - 5,750 = 1,750
Do this: Charge only the change.
Usually costs: 2 marks.
Mistake: Not deducting provision from debtors
Skipping the balance sheet.
Wrong working
Debtors 1,50,000
Right working
Debtors 1,50,000 less 7,500
Do this: Show net debtors.
Usually costs: 1 mark.

Exam tips

Use the 3-point table for differences.
Show the account in T-form with balances.
Mention that provisions are made even if there is no profit.

Practice questions on Provisions: Meaning, Examples and the Difference from Reserves

Write each answer on paper first. Open the hint only if you are stuck, and the answer only when you have finished.

Q1 · 1 mark · MCQBoard level
A provision for doubtful debts is shown in the balance sheet:
(a) on the liabilities side as capital (b) as a deduction from debtors (c) as an asset (d) as an expense
Hint
Net debtors.
Answer
(b) as a deduction from debtors
Q2 · 3 marks · Short answerBoard level
Why is a provision charged even if the business makes a loss? (3 marks)
Hint
Liability exists.
Answer
A provision covers a loss or liability that has already arisen. It is a charge against profit, not an appropriation, so it is made whether profit is earned or not, following prudence.
Q3 · 4 marks · Short answerHarder board level
Debtors Rs 2,40,000, further bad debts Rs 10,000, old provision Rs 7,000, new provision 4% of the remaining debtors. Find the charge to P&L and the balance sheet figure of debtors. (4 marks)
Hint
Good debtors = 2,30,000.
Answer
New provision = 9,200; charge for provision = 2,200; with bad debts Rs 12,200 total. Debtors in the balance sheet = 2,30,000 - 9,200 = Rs 2,20,800.
Q4 · 5 marks · Long answerHarder board level
A firm provides for a Rs 1,20,000 renewal every 4 years. After 2 years the provision balance is Rs 60,000; at the end of year 4 the renewal costs Rs 1,28,000. Show the amount charged in year 4 and the total charge over 4 years. (5 marks)
Hint
30,000 a year.
Answer
Annual provision 1,20,000 / 4 = 30,000. By year 4 the provision is 1,20,000. Renewal cost 1,28,000 is charged to the provision; excess 8,000 to P&L. Year 4 charge = 30,000 provision + 8,000 excess = Rs 38,000; total charge over 4 years = 4 x 30,000 + 8,000 = Rs 1,28,000.
Q5 · 3 marks · Short answerHOTS / competency
A manager argues that provisions can be reduced to raise profit when needed. Evaluate with a provision of Rs 18,000 against genuine expected bad debts of Rs 16,500. (3 marks)
Hint
Excess provision.
Answer
A provision must reflect the expected loss. Here the excess is only Rs 1,500; reducing it below Rs 16,500 would overstate profit and break prudence, so only the Rs 1,500 excess can be released.

Test your recall

Answer in your head or on paper first, then open the card. Pulling an answer out of memory makes it stick far better than re-reading.

1.Provision is charged where?Show answer
Against profit (P&L debit).
2.Is a provision compulsory?Show answer
Yes.
3.Reserve is made from?Show answer
Profit.
4.Provision for doubtful debts shown how?Show answer
Deducted from debtors.
5.Provision for depreciation shown how?Show answer
Deducted from the asset.

Provisions: Meaning, Examples and the Difference from Reserves: frequently asked questions

Is provision a liability?

It covers a liability or loss; some provisions are shown as liabilities.

Can provisions be distributed?

No.

Is bad debts a provision?

No, it is an actual loss.

What is excess provision?

The surplus released back to P&L.