Question

Select the most appropriate answers from the alternatives given below and rewrite the sentence.

A provision is __________.
a) an appropriation of profit
b) charge on the profit
c) Investment
d) current asset

Answer 1

A provision is charge on the profit.

Explanation:
A provision is made out of profits for a known liability. It is a charge against the profits, as it is created for a known liability, but its amount cannot be determined with reasonable accuracy. It is necessary to create provisions in order to meet the liabilities in the future. The losses that actually occur will be written-off against these provisions and, hence, the profits of the year in which the losses occur will not be affected. Thus, a provision is a charge on profit and not an appropriation.