Question

Explain the concept of provisions.

Answer 1

Provisions: Provision is an amount set aside out of profits to meet some specific or probable expenses or loss. A provision must be created whether there is a profit or loss. It is a charge against the profit and not the appropriation of profit. It should not be treated as surplus and thus cannot be distributed among shareholders. This is a reserve which is created to provide for any known liability of which the amount cannot be predetermined. Thus the amount of provision is an estimate only and not an exact amount. However, a provision in excess of the required amount is treated as the reserve.