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What is the difference between reserve and provision?

Author:
Harold Averkamp, CPA, MBA

Definition of Reserve

Many decades ago, U.S. accountants decided to eliminate the word reserve when reporting the balances in contra asset accounts. The accounting profession felt that the word reserve might be interpreted to mean that money had been set aside to replace certain assets.

Examples of Past Use of Reserve

Two examples where the term reserve had been used include the following contra asset accounts:

However, U.S. companies continue to use the term reserve in regards to the accounting for inventories using the LIFO cost flow method. For example, the company will use a contra inventory account entitled LIFO Reserve to report the difference between the company’s current inventory cost (had FIFO been used) and the LIFO cost.

Definition of Provision

The term provision is sometimes used by corporations when reporting an expense that is an estimated or uncertain amount. Two examples include Provision for Doubtful Account Expense and Provision for Income Tax Expense.

NOTE: While some accountants use the term provision to describe the current year expense/increase in an account balance, others use provision to mean the balance in an account balance.

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About the Author

Harold Averkamp

For the past 52 years, Harold Averkamp (CPA, MBA) has
worked as an accounting supervisor, manager, consultant, university instructor, and innovator in teaching accounting online. He is the sole author of all the materials on AccountingCoach.com.

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