What are provision in financial statements?

Provision is the amount which kept aside to cover future expenses. A provision is a separated fund which kept aside to cover certain expense. A provision is not a reserve. The main purpose is make balance sheet more accurate in accounting period or financial year.

A provision can recognised if it meets criteria

• An entity which has present obligation due to past events.
• It may be cash outflow to settle obligation.

Objectives of provisions are as follows −

• Correct financial statements.
• Predict losses and liabilities.
• Meet known losses and liabilities.

Examples are as follows −

• Guarantees.
• Losses.
• Deferred tax.
• Restructuring liabilities.
• Depreciation.
• Bad debts.
• Sales allowances.

The amount which is kept aside to pay for firm income tax is called tax provisions. Tax deductions include depreciation, allowances, interest expenses etc. After some calculations, the firm determines its amount to be allocated on its books in a provision known as tax provisions.

Types of provisions are as follows −

• Provision for bad debts.
• Restructuring liabilities.
• Guarantees.
• Depreciation.
• Accruals.
• Pension.

Journal entry for provisions