The differences between Provision and Reserve are:

1. Basic Nature and Purpose A provision is a charge against profit created for a known liability or expense where the exact amount is uncertain. It is made to ascertain true and fair profit. In contrast, a reserve is an appropriation of profit created to strengthen the financial position of the business.

2. Compulsion and Effect on Tax Creating a provision is compulsory (adhering to the principle of Prudence) even if the business incurs a loss, and it reduces taxable profits. Conversely, creating a reserve is generally at the discretion of management (unless law mandates it), requires profits to exist, and has no effect on taxable profit.

3. Presentation and Usage Provisions are shown as a deduction from assets or under current liabilities and cannot be used for dividend distribution. Reserves are shown on the liabilities side after capital and can be utilised for the payment of dividends.