Provision refers to the setting aside of certain amount to meet some contingencies which may be expected but not yet incurred. In other words, provision usually means any amount written of or retained by way of providing depreciation, renewal or diminution in the value of assets. It is a charge to the profit and loss account. Some examples of provision are as:
- Provision for bad and doubtful debt.
- Provision for discount on debtors.
- Provision for taxation.
- Provision for depreciation.
- Provision for repairs and renewals etc.
Provisions are either shown as deductions from assets in the balance sheet or on the liability side of balance sheet. When provision is no longer required, it is treated as a profit.
- Provisions are made for expected contingencies.
- It is a charge to the profit and loss account.
- They are always made for a specific purpose.
- To ascertain the true net profit or loss.
- To know the true financial position of the business.
- To cover the loss in value of assets.