Reserves

The term "Reserve" indicates a portion of profit (not when a loss is realised) set aside for any particular purpose. Thus, reserves reduce the divisible profits available for distribution as dividends. Whereas reserves are undistributed profit, provision, on the other hand, is an estimated expense or loss which must be taken into consideration before profit is ascertained. If the amount put to a provision is in excess of requirement, the excess will be treated as reserve. In the terminology in USA, "reserves" are called "Retained Earnings". More discussions on "reserves"  are deferred to a later section. 

It is re-emphasized that providing for Reserves is part of contents of P & L A/c.