PROVISION

MEANING OF PROVISION

       
                 Provision is a charge against profits. It purpose is not to meet certain known or contingent liabilities. It must be provided for whether there is profit or not. Provision is an estimated amount off liability and is debited to Profit Loss Account to ascertain the true Profit.

                 According to the Company Act, 1956 the term provision has been defined as " any amount written off or retained by way of providing for any known liability for which the amount can't be determined with substantial accuracy ".

                 Examples of provisions are Provision for Depreciation, Provision for Bad and Doubtful debt, Provision for Discount on Debtors, Provision for Taxation etc.

CHARACTERISTIC OF PROVISION

• It is made to meet known liability.
• It is the liability which can not be determined with reasonable accuracy.
• It is charger against profits.
• It is an internal transaction.

IMPORTANCE OF PROVISION

• To ascertain the true profit of the business - All expenses relating to the accounting year, whether paid or due must be charged to profit and loss account.Provision should be made for expenses or liabilities in order to determine the true profit of the business.
• To ascertain the true financial position of the business - If adequate provision is made for anticipate expenses or losses in the balance sheet, it will show the true financial health of the business.
• To provide equitable distribution of expenses - Making provision for expenses and losses provides equal burden of the Profit and Loss Account of each year.
• To provide funds for known losses or liability in the future - Provision are made to provide funds to meet the losses or liabilities which are likely to occur in the future.