A provision is the sum of amount set aside by charging against the profit ans loss account. It is created for meeting a known loss or liability. It is maintained for meeting an anticipated loss or liability of uncertain amount.
Meaning of Provision
Search amount of anticipated loss liability can only be estimated. If the present regular transaction undoubtedly brings Souten losses all abilities of the unknown amount in the future then provisions should be made on them in the current year’s book. Such provision should be made every year by debiting the profit and loss account without considering whether the business is in profit or loss. A provision is always created for a specific purpose. It is not meant for the distribution of the shareholders. The provision, in fact, reduces the figure of business profit and not the figure of divisible profit.
Generally, a business maintains different types of provisions with some its history proposes. They are:
- Provision of bad and doubtful debts
- Provision for discount on debtors
- Provision for taxation
- Provision for repairs and renewals
Objective of Provision
Some of the important objectives of maintaining provision are as follows:
- To meet anticipated losses and liabilities: provisions are created for meeting anticipated losses and liabilities source as provision for bad and doubtful debts, provision for discount on debtors, and provision for taxation.
- To meet known losses and liabilities: Provisions are created on meeting non-losses and liabilities such as provision for repairs and renewals.
- To present correct financial statements: In order to present financial statements and to report profit and financial position, the business must maintain provision for known liabilities and losses.
A provision is an amount set aside by debiting the profit and loss account for a specific purpose. It is maintained to meet a known loss or liability the amount of which is not certain.