Provisions and Reserves Class 11 Accountancy, Examples, Difference
Provisions and Reserves Class 11 Accountancy explains how businesses set aside funds for future liabilities and strengthen their financial position. Provisions cover known but uncertain expenses like doubtful debts or depreciation, while reserves are created from profits for future stability and expansion.
Ananya Gupta11 Nov, 2025
Provisions and Reserves Class 11 Accountancy: As a Class 11 Accountancy student, mastering the concepts of Provisions and Reserves is essential for accurately preparing final accounts. These two concepts are vital tools that businesses use to present a true and fair view of their profits and financial position.
They help businesses manage future uncertainties, plan for growth, and meet expected expenses. This detailed explanation will help you easily understand the core meanings, types and the key difference between provisions and reserves in Class 11.
Provisions and Reserves Class 11 Accountancy Overview
The financial statements of a business, like the Balance Sheet and Profit and Loss Account, must show a true and fair view of its financial position and performance. To ensure this, it is essential to correctly account for expected liabilities and set aside funds for future needs. This is where Provisions and Reserves come into play. Understanding Provisions and Reserves is a key topic in Accountancy Class 11 short notes and for your Provisions and Reserves Class 11 revision.
What are Provisions?
A Provision is an amount set aside out of the business profit to meet a known liability. The exact amount of this liability however cannot be determined with certainty.
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Nature: It is a charge against the profit. This means the profit is calculated after the provision has been created.
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Purpose: To cover an expense or liability that has already occurred but whose amount is uncertain.
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Necessity: Creating a provision is a legal necessity based on the Prudence/Conservatism Principle of accounting, which states that anticipated losses must be recorded, but anticipated gains should be ignored.
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Impact: Since a provision is a charge against profit, it reduces the business's taxable profit.
What are Reserves?
A Reserve is an amount of profit that is set aside and kept for a future specific or general purpose. Unlike provisions, a reserve is not meant to cover a known liability or expense.
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Nature: It is an appropriation or distribution of the profit. This means the reserve is created after the profit has been calculated.
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Purpose: To strengthen the financial position of the business, for business expansion, or to meet an unexpected future contingency.
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Necessity: Creating a reserve is not a legal necessity though some are mandatory, like the Debenture Redemption Reserve but is a matter of financial prudence.
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Impact: Since a reserve is created from post-tax profit it does not reduce the taxable profit of the business.
Types of Reserves
Reserves can be broadly classified as:
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Revenue Reserves: Created from the profits earned from the normal regular activities of the business.
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General Reserve: Kept to strengthen the business overall financial position.
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Specific Reserve: Created for a particular purpose, such as a Debenture Redemption Reserve for repaying debentures or a Workmen’s Compensation Fund.
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Capital Reserves: Created from capital profits that do not arise from the normal operations of the business e.g., profit on the sale of a fixed asset or premium on the issue of shares.
Provisions and Reserves Examples Class 11
The most common examples of provisions include:
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Provision for Doubtful Debts to cover potential losses from customers who may not pay.
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Provision for Depreciation to cover the reduction in the value of assets.
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Provision for Taxation to cover the tax liability for the current year.
Difference Between Provisions and Reserves Class 11
This table summarizes the core concepts and is vital for your Class 11 Accountancy Provisions and Reserves notes:
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Difference between Provisions and Reserves Class 11 |
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Basis of Difference |
Provision |
Reserve |
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Meaning |
An amount set aside for a known liability of uncertain amount. |
An appropriation of profit set aside for future use or to strengthen the business. |
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Nature |
Charge against Profit made before calculating taxable profit. |
Appropriation of Profit made after calculating profit. |
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Necessity |
Creation is a legal necessity to provide a true and fair view of the profit. |
Creation is optional (management decision), except for certain statutory requirements. |
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Purpose |
To meet a specific estimated future loss or expense. |
To strengthen the financial stability or meet unexpected future expenses. |
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Tax Impact |
Reduces the taxable profit. |
Does not reduce the taxable profit. |
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Balance Sheet |
Shown on the liability side, usually as a deduction from the concerned asset (e.g., Provision for Depreciation) or under current liabilities (e.g., Provision for Tax). |
Shown on the liability side under the heading Reserves and Surplus. |